Purchasing a house is a major investment particularly if you’re going to have to finance most of the value of the transaction. By taking the appropriate measures to build your credit before buying a home, you may be able to receive better offers from mortgage companies, which will mean lower monthly payments and a better long-term financial position. This is especially true if you’re less than wealthy because you’ll undoubtedly want to save every dollar you can. Follow the tips below to shore up your credit in advance of shopping for a new residence.
Examine Your Credit Report
Before doing anything else, it’s critical that you obtain copies of your credit reports from all three of the major credit bureaus. As long as you haven’t requested them in the past year, you’re entitled to get them for free. Then review the information contained in them, such as your payment history and outstanding debts, to get an idea of where you need to improve. Look at these documents carefully to ensure that all the data listed is accurate.
Challenge Any Errors
In the event that you discover inaccuracies in your credit reports, you should challenge the incorrect info. Go to the website of the company in question and follow the instructions for filing a dispute. This will probably involve a lot of correspondence between you and the credit agency. Save copies of all paperwork you send and receive to reduce the possibility of future mistakes.
If you don’t have time to do all of this legwork or you’d feel more comfortable turning the job over to professionals, then you may wish to engage a credit repair organization. These firms are familiar with how the credit bureaus operate, and they may be able to accomplish great things without your having to personally attend to every detail.
Make Timely Bill Payments
One of the key factors that influences your credit score is a history of paying your bills on time. It’s probably too late to redress any lapses you’ve had in the past, but don’t let this dissuade you from staying on top of your obligations going forward.
Maintain a Few Tradelines
A tradeline is a credit card, student loan, or other credit account. It’s important to show recently used tradelines so that lending institutions can get a picture of how well you manage credit. If you’re considering closing old accounts, think twice: It might be better to instead begin carrying balances on a couple of them. This is because older tradelines carry more weight than those that are relatively new. Once again, it’s very important to make payments on time if you take this path. Most experts recommend having at least three active tradelines.
Avoid New Credit Lines
You may need to create new credit accounts to have enough tradelines going, but opening any more lines of credit beyond this is an unwise move. Hitherto unused credit lines represent a risk in the eyes of lenders because there’s no way of knowing how responsibly you’ll behave with these new resources.
Despite your best efforts, you may find yourself having trouble qualifying for a conventional loan. Luckily, there are other options, though not all are available at traditional banking institutions.
If you live in a rural area, a USDA 502 Direct or Guaranteed loan may represent your best chance for affordable financing.
Guaranteed loans are offered at a fixed rate over 30 years. 502 Direct loans start at 33 but can go up to 38 years (30 for manufactured homes).
You can apply for a 502 loan only at a financial institution that has received approval from the Rural Housing Service. In order to qualify for this program, you must meet the certain rules, which include:
- For Guaranteeed loans, your income must be no more than 115 percent of the median income in your area. For Direct, it can be no more than 80 percent of area median income based on household size.
- Based upon your income level and credit history, you must be unable to obtain a conventional mortgage.
- The sum of your monthly mortgage principal payment, interest, taxes and insurance cannot exceed 29 percent of your gross income per month.
- Debt payments can’t account for more than 41 percent of your gross monthly income.
- The home you intend to buy must comply with standards set by HUD.
Even if your credit history has been a bit shaky in the past, you can act now to improve it. Don’t let carelessness or laziness force you to pay more for home financing than you absolutely have to. The joys of homeownership are real and valuable but they’ll diminish quickly if you find your finances stretched to the limit due to poor foresight.
Maricel Tabalba is a freelance contributor for Credit.com who is interested in writing about personal finance advice for Millennials and college students. She earned her Bachelor of Arts in English with a minor in Communication from the University of Illinois at Chicago.