Buying a House with Bad Credit: How to Fix It Before You Buy

Approximately 68 million Americans (30 percent of all scoreable people) have a “bad” or “poor” credit score.

If you’re one of them, you might have a hard time making large purchases like a car or a home.

Buying a house with bad credit is possible. But it can be quite difficult.

If you want to avoid the hurdles associated with this process, consider improving your credit before you try to buy your dream home.

Read on to learn everything you need to know about improving your credit.

Why You Should Avoid Buying a House with Bad Credit

In some cases, you can still get approved for a home loan even if your credit score is less-than-ideal.

At the time, though, just because you can do something, that doesn’t always mean you should.

If you buy a house with bad credit, you may get approved for a home loan, but it will likely come with very high interest rates and fees.

You may also have to make a very large down payment. For example, if you have a credit score of less than 580 and want to qualify for an FHA loan, you’ll have to pay a 10 percent down payment. 

If you can’t afford a large down payment or don’t want to deal with astronomical rates and fees, it’s probably a good idea to table the idea of buying a home until you can boost your credit score. 

How to Improve Your Credit Score

Are you ready to start improving your credit score? Are you unsure of where to begin? Start with the following credit repair strategies:

Check Your Credit Report

One of the first things you should do if you’re interested in improving your credit score is to obtain a copy of your credit report. This will tell you your credit score, and it will also let you know if there are any errors that are bringing your credit score down.

Some common errors that can impact your credit score include:

• Inaccurate personal information (name, address, Social Security number, etc.)
• Not all credit accounts are being reported
• Not all payments are being recorded
• Old debts are still showing up 

You should also be on the lookout for accounts or credit applications that you don’t recognize. These fraudulent accounts or applications could be negatively affecting your score.

Make All Your Credit Card Payments on Time

Do you have a hard time keeping up with your credit card payments? Are you regularly making late payments or forgetting them altogether?

If this is the case, you’re going to have a hard time improving your credit score.

Go through all your credit card agreements and find the due date for each bill. Then, set reminders in your phone or write them down on your calendar so you don’t forget to pay them.

You can also set up automatic payments to take the guesswork out of the equation.

Avoid Adding to Your Debt

If you have a lot of credit card debt that’s dragging your credit score down, start working on paying it down. To do this, stop using your credit cards. That way, you won’t continue adding to your debt. 

It’s also a good idea to try and pay more than the minimum payment your lender requires.

If you only make the minimum payment, it will take you a very long time to improve your credit score, and you’ll end up paying a lot more in interest.

Be Cautious When Closing Old Accounts

In many cases, it’s a good idea to avoid closing old accounts, even after you’ve paid them off.

When you close accounts, you decrease the amount of credit that is available to you. This, in turn, can negatively affect your credit score by raising your credit utilization ratio. 

There are some accounts that you may want to consider closing, though.

For example, credit cards you don’t use regularly that have an annual fee can eat a hole in your bank account. And, credit cards with unfavorable terms or high interest rates might be doing you more harm than good.

Avoid canceling your oldest credit cards, though. These cards have the longest history and will be most beneficial to your credit score.

Avoid Additional Credit Applications

Every time you apply for a new credit card (including store credit cards), your credit score takes a hit. This hit occurs whether or not you get approved, and it impacts your score for a full year.

It’s true that this hit is small — usually between three and five points. But, 3-5 points can be the difference between one qualifying credit score and another. Remember, too, that those points add up if you’re applying for multiple credit cards in a short period of time.

Don’t worry about the credit checks lenders perform when you’re applying for a home loan or undergoing a background check. These are soft inquiries, and they do not affect your credit score at all.

Improve Your Credit Utilization Ratio

You might assume that you can charge as much as you want to your credit cards each month, as long as you’re paying off the balance in full. This isn’t actually the case, though.

If your credit utilization ratio is too high (i.e., you’re charging a large percentage of your total credit limit), your credit score can take a hit. 

Try to keep your credit utilization ratio to 30 percent or less. If you have a credit card with a $2,000 limit, for example, try to avoid charging more than $600 per month. 

If you know you’ve charged more than that 30 percent, try to pre-pay a portion of the balance. That way, you’ll keep your credit utilization low and will boost your credit score.

Improve Your Credit Score Today

As you can see, it’s best to focus on improving your credit score instead of buying a house with bad credit.

These tips will get you pretty far when it comes to getting a better credit score. If you need more advice, though, we’ve got you covered.

Check out the credit repair section of our website today for tons of great articles that will teach you everything you need to know about managing your finances and building up your credit score.