credit repair

Home ownership has long been considered an integral part of the American Dream. Even today, as homebuying trends change in the years following the Great Recession, more than half of renters believe owning a home is necessary to live the American Dream. Despite the aspirational data, the rate of homeownership in the United States fell to a 48-year low of 63.4 percent in 2016, with many Americans lacking the financial resources to purchase a home.

Still, today’s low mortgage interest rates make home ownership very attractive. Borrowers with excellent credit scores can expect rates of approximately 4 percent for a 30-year, fixed-rate mortgage. With these rates, monthly mortgage payments are generally lower than monthly rent, especially in large metropolitan areas where rents have skyrocketed. Unfortunately, many renters interested in buying a home are deterred by significant down payment and credit score requirements. According to a Zillow report cited by Newsweek, 86 percent of renters said saving for a down payment or low credit score were the biggest hurdles to buying a home.

Even in the face of some doom and gloom, many renters remain optimistic of financing a home in the future. Zillow’s April 2017 Housing Aspirations Report found 63 percent of renters are confident they’ll be able to afford to finance buying a home in their lifetime. If you’re in this category and see yourself buying a home in three, five, or even 10 years, the time to start thinking about your finances and credit is now. Make a plan to start saving for a down payment, and most critically, take the steps to repair your credit, if needed.

How Does Your Credit Score Impact Mortgage Rates?

First things first: your credit score and your credit report are two separate things. Your credit reports are compiled by three national reporting bureaus: Equifax, Experian, and TransUnion. Your credit score is determined by the information in your report and can be used to gauge your overall creditworthiness. Fair Isaac & Co., better known as FICO, assigns you a credit score based on number of factors, including:

  • Payment history
  • Overall amount owed
  • Length of credit history
  • New credit
  • Types of credit

What’s a good score, you ask? FICO scores range from 350 to 850, with 723 being the median score in the U.S. Generally, you can expect to get the best mortgage rates with scores above 740. With a score of 620 or below, you might have difficulty obtaining a mortgage at all.

What are Your Mortgage Options? 

In an ideal world, every prospective homebuyer would have a credit score of 740-plus and enough money saved to make a 20-percent down payment. Buyers with these characteristics can obtain the best mortgage rates and avoid the added costs of private mortgage insurance.

Unfortunately, not every prospective buyer has an excellent credit score. If your credit score is below 600, there are still mortgage options available. Borrowers can qualify for a Federal Housing Administration loan with a credit score of between 500 and 620 and a down payment of 3.5 to 10 percent. However, these loans will almost certainly come with higher interest rates and require federal mortgage insurance on top of the loan, increasing your monthly payment.

Depending on the size of your loan, the difference of a single percentage point on your interest rate can reduce your monthly payment by hundreds of dollars. So, instead of jumping into the homebuying process with less-than-average credit, it’s a better idea to take the time to improve your credit score and obtain better interest rates down the road.

You Can Improve Your Credit Score to Buy a Home

If buying a home is in your short- to medium-term future, your first step should be to check your credit report and FICO score. Luckily, both are relatively easy to obtain. The Fair Credit Reporting Act requires each of the three credit reporting companies to provide you with a free copy of your credit report once a year. You can order your free report at annualcreditreport.com.

You can also view your FICO score for free. Discover provides a free credit scorecard with your FICO to both members and non-members. If you have an American Express charge card, you can also view your FICO score for free.

Based on the information from you reports and your credit score, you should get an idea of where you’d stand if you tried to secure a mortgage. If you find a low score and multiple report negatives, it might be time to think about repairing your credit.

Consumer protections mandate that information reported about you to credit bureaus must be fair, accurate, relevant, substantiated and verifiable. Partnering with a credit repair service can help you identify items you might want to challenge or change and build a game plan to meet your goals, such as buying a home.

While some credit repair services have garnered a bad rap, others provide the comprehensive services that help their members meet their goals. A reputable credit repair service should interact directly with the credit companies and help them to meet their obligations for your particular situation and plan. Then, they should communicate with the credit bureaus to confirm that the appropriate changes have actually occurred. From there, the company should help facilitate credit score tracking and alerts to help you stay on track to achieving your goal of owning a home.

If you’re looking to get your credit in order so you can get in a house, learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.