#42: How to fix your credit to buy a home | How to prepare your credit score to buy a house
What raises your credit score fast?
If you’re wondering how to fix your credit to buy a home, you are in the right place! But first things first, it is okay to buy a house with student loan debt. It just might be a little more challenging.
To be clear though, it is easier to buy a house with no debt, but that's not the common story for most people.
These tips will help you prepare your credit score to buy a home in one year or less.
When I first was pre-approved, my credit score was in the 600s. That’s not a bad thing but it did impact the loan I could receive, my interest rate and overall monthly payment. I wasn’t happy with it at all.
I still decided to continue with the homebuying process but quickly learned as a first time home buyer, that your finances matter. I wasn’t being denied of every offer I put in. And the amount I was pre-approved wasn’t helping since I was trying buying in a high-cost area.
I took a few years away from the process to pay off some of my debt. I want to help you show you how to prepare your credit score in less time so you can be less stressed and ultimately know how to prepare to buy a house in one year.
Here's what I did to improve my credit score:
I improved my credit score by keeping my utilization under 30%
My credit score limit may have been $6,000 but I definitely didn't spend that. If you adhere to $6,000 limit, that means spending less than $2,000 a month. This is usually easier to manage, meaning it's easier to pay off. Imagine having to pay $6,000 every month. That's an easy way to bring credit scores down the most. Whew, that's scary. I only put necessary bills on my credit card and they are small. For example, my music streaming is connected automatically and that's less than $20 monthly.
This process is different for my travel credit card, which I use for travel-related activities such as dining, online grocery shopping, flights, hotels, stuff like that. I love traveling just as much as managing my money so I had to find a creative way to do both.
I increased my credit score by paying off my balance in full every month
Not only does this help you manage your budget, but also shows that you are a responsible borrower. Paying in full every month will help you increase your score after months of doing it. It's a gradual increase, but an increase nonetheless. Credit card companies like when you pay in full.
If you continue to carry a balance month after month, it will impact your credit score and how much someone (a lender for example) is willing to lend you.
I improved my credit score by paying off some of my accounts
I spoke about paying off my student loans, but I also paid off my car note. In fact, I did that first because it was smaller. I've shared this story with people often and they are usually afraid that paying off debt/closing accounts will drop their score. It will. But only temporarily. It will jump right back up after a few weeks. So no fear.
Here's how my credit score impacted my homebuying experience.
My credit score impacted my pre-approval amount
I remember when I received my first pre-approval. It was $210,000 in DC. Expensive a%^ DC! Like what was I possibly going to buy with that? But because I had so much debt (between my pre-owned vehicle and my student loans), my credit score was impacted. I carried a balance on these open accounts every month.
My credit score impacted my debt to income ratio
A debt to income ratio is a percentage lenders assign to you based on a number of financial factors - but your credit score is one of them. The higher it is, the more risky you are as a buyer. I was bordering 45% which is not great. And that usually came with a higher interest rate and limitations on the type of loans I qualified for.
At that time, I could qualify for an FHA loan (which is not a bad thing) but I ended up improving my debt-to-income ratio enough to qualify for conventional. That freed up that FHA loan to purchase a multi-unit later, which will allow me to put down as little as 3.5% as a down payment. Work smarter, not harder.
My credit score impacted my interest rate
My credit score was a direct reflection of how responsible I am as a borrower. And lenders paid attention to that. Granted, there are many other factors that impact your interest rate. But your credit score is one of them. The better your score is, the lower your potential interest rate can be. A lower interest rate = smaller monthly mortgage payments. A winning scenario!
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Resources:
Video - Closing on my new construction home (part 1):
https://youtu.be/X77z5bIS1ko
Video - Closing on my new construction home (part 2): https://youtu.be/sAtvnE2DUKU
Video - Closing on my new construction home (part 3): https://youtu.be/4HAY7FmcGGA
How to break down your monthly mortgage payment - PITI explained:
https://youtu.be/PUpvUNCGj38
Open a high-yield savings account and get an extra 1% in interest: https://www.marcus.com/us/en/savings/referral?referralcode=JOS-2LH-CT84
How I saved for my down payment with a high-yield savings account video: https://youtu.be/s9fKzC6sZXQ
What is an Earnest money deposit video: https://www.youtube.com/watch?v=xxYZL7I5wx0&t=0s
[VIDEO] My debt free journey: https://youtu.be/C0Tyt3n7PCY
The #1 Workbook for first-time homebuyers: https://www.realestatepreppod.com/ready-to-own
Biggest mistake I made in my homebuying journey: https://youtu.be/Yn-LsYujGtA
First time homebuyer loans:
https://www.realestatepreppod.com/first-time-homebuyer-loans
Instagram (we have lots of fun over here):
https://www.instagram.com/realestatepod
Podcast: Real Estate Prep:
https://www.realestatepreppod.com/episodes (available on all streaming platforms)
Ready to find the right real estate agent for you? Download my free checklist for questions to ask:
https://www.realestatepreppod.com/homebuyers-checklist
Want to get your finances together for your big home purchase? Join my free Homebuyer Goals Challenge:
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