How To Build Credit So You Can Buy A House

Certified Mortgage Advisor
NMLS 1701021
Published 
August 12, 2019

Buy a house with your credit

Now, we will be talking about how to build and improve your credit so that you can buy a house. So if you're looking at buying a house, maybe this is your first time, or it might be the second or third time. And you're just looking to make sure that your credit score is good enough to buy a home you're in the right spot. We're not only going to talk about how to build credit, but we're going to talk about some little tips. You can use it to improve your credit if it's kind of in the ashes right now, or even if it's great, what you can do to keep it growing.

What makes credit so puzzling

The problem is credit is like this big mystery and it runs so many of the big purchases that we make in our life. But there's not a definitive guide on how to use it. And then you go and maybe you look up credit karma or something online to find what your score is, and then you go to a lender for a mortgage or a car loan or a personal loan, and your score is different. And so it's hard to track since your score is different all over the place and you don't get all of the information upfront. It's hard to figure out what your score actually is and how you can improve it. You don't even have a baseline to know how to improve, to become with.

Rules to to build your credit

So I'm going to give you a couple rules on how to build your credit and figure out where it's at. So number one, let's talk about target score. Where should you be?

Target Score

The target score that you want to hit from what I've found through multiple different lenders is you want to be at least a 640. That's not the minimum to qualify. If you're getting an FHA loan, you can go all the way down. It's like a 580, sometimes even a 500, usually 580 is going to be the standard for your credit score on an FHA.

640 as your target

But your interest rates are going to get a lot better when you hit that 640 range. I work as a mortgage broker, so I work with a lot of different lenders. And what I've found is when we're pricing the loans with different lenders, anytime you hit that 640 credit score and above you get, alarmingly, better interest rates. For some reason, there must be some statistics that they're working with and their analytics to see that people who have 640 scores and above default less on their mortgages. So 640 is a great target. So to figure out where you're at you're going to have to do what's called a soft pull on your credit.

Soft Pull & Hard Pull credit

So anytime you get your credit score for free, that's going to be a soft pull. So anything like credit, karma, or mint or a, if your credit card gives you a score, that's going to be a soft pull. So there's two different types. There's a soft pull and a hard pull. A soft pull is like a little glimpse at your credit.

And a hard pole is the full, detailed picture. And the way I like to think of it is like a soft pool is almost if you took your credit score and you threw a blanket over top of it, you can make out the shape and see what it is. You can see how it's moving, but you don't see the full picture where a hard pool is you're pulling the blanket off of that credit score and you can see everything in there and that's the real number.

So if you're using something like credit karma or something to pull your credit score online, it's going to give you a really good idea of your score's momentum. So if it's going up or down and then just a general range of where you're at. So if credit karma says it's 640, then you can expect if the lender pulls your credit score that it could be maybe 680 or it could be maybe down to 620. So give it a fair range when you're looking.

What is credit?

So now that we know what score we need let's talk a little bit, just philosophically about credit. What does credit score really mean? Sometimes credit and maybe this is just a really good marketing technique on the credit company, credit card companies, but credit is not synonymous with how good you are with money. Credit is only a number that tells you how well you pay back debt. That's all it tells you is, how well do you pay back debt with a number?

How to know if you have good credit score?

So now that we know what score we need let's talk a little bit, just philosophically about credit. What does credit score really mean? Sometimes credit and maybe this is just a really good marketing technique on the credit company, credit card companies, but credit is not synonymous with how good you are with money. Credit is only a number that tells you how well you pay back debt. That's all it tells you is, how well do you pay back debt with a number?

Can we buy home without credit?

So that brings us the question of, do you need credit to buy a home? The short answer is it's so much easier if you have a credit score and a good credit score to purchase a home. If you don't have credit, that's no problem.

No credit, do manual underwrite

You can do what's called a manual underwrite with a lender. So if you don't have any credit established maybe you're younger or maybe you've just never used any debt of any sort, then you can do, what's called a manual underwrite, and you'll talk with a lender about this, and it's a little bit more paperwork intensive to document because they have to document trade lines.

What will an underwriter check if your don't have credit?

So they're going to look at your rent history, maybe utility bill. To verify your ability to pay back debt of sorts. So you can get a loan without a credit score, but you're gonna run into it being a more difficult process. And you're probably going to pay a higher rate because loans without credit scores are more risky.

How to establish credit?

If you don't have credit, a good way to establish. Is to begin opening some accounts. So one way you could do this safely is to open a secured credit card. Or you could look at taking your rent payments and putting them on your credit report as well.

So long story short, it's great to have credit because it makes the process so much smoother, especially if that credit is really good. And it doesn't take that long to establish. If you had no credit right now, what I would do is go open a secured credit card account. Start with that. Let that kind of be a good baseline for you. And then maybe look at some other small loan or something that you could pay off quickly. Just add it as another trade line for you.

What's a bad credit?

So let's talk about bad credit real quick. First of all, do you need a credit repair company? This one terrifies me a little bit. On one hand, I think if you have a reputable company that you know of, you've had friends or family in that company and they can give you a really strong recommendation. Then that might be a great option. The problem is there's a lot of credit companies out there or credit repair companies out there who just, frankly, don't do a lot or they do some, but they just do it slower than you could. Because you can repair your credit on your own, you really can.

CFPB

If you want to repair your credit on your own, you can check the CFPB. Consumer Financial Protection Bureau is a website and it gives you a step-by-step guide on how to repair credit, you can check out this link: https://www.consumerfinance.gov/. This would be, disputing any errors on your credit report. You can do this on your own. It's really not terribly difficult. You're just gonna mail some documentation into. The credit reporting agencies like TransUnion, Equifax, and Experian. It's really not terrible to do.

You can have someone pay for you to do that, but just make sure that they're a reputable company because it's very easy for you to go on a site like credit karma, look at some derogatory accounts or see if you have any errors and then you can contact those companies, and either arrange payoffs or pay for deletions or straight up, just get those disputed with those companies by yourself, and you'll save yourself some money because sometimes credit repair companies can be a little expensive and the process is slow enough that it can add up to quite a bit over a period time.

Golden Rules to Build Credit

So now let's talk about the three golden rules that I use with all my clients to help them build credit. So number one is time. Number two is ratios and number three is accounts. So this is how I organize and think of it the best way possible.

Golden Rule #1 Time

So we'll start with number one. By time, what I mean is pay on time. Rule one is just simply pay on time. Nothing hurts your credit report worse than you missing payments.

Because when you miss payments leads into the whole spin cycle of having collection accounts or bankruptcies. Obviously it's hasty to get there that fast. If you miss one payment doesn't mean you're going to have a bankruptcy here soon, but it leads down that path and having a missed payment. Hurts your credit score so much. It's ridiculous.

More than anything else paying on time is the single most important factor to making sure your credit score is good and is continuing to grow and doesn't drop down. So if you do miss a payment, keep in mind that's going to be on your credit report for quite a while, and to make up for that, it's not just going to go away. You're going to have to make sure that you continue to press in and really make sure everything else in your credit report is good and you never miss a payment again. So one thing to do is set up auto payments, make sure that you are always on track of that bill.

If you need to set up auto payments, set up a reminder, the day that's going to get pulled out, set up a reminder five days before that a payment is gonna come out. That way make sure money is always there. If it's not, you can get it in there. You have to make sure that you pay on time. Otherwise your credit score will drop very quickly.

Golden Rule #2 Ratios

Number two is ratios. So this is where some of the weird parts in the mystical parts of credit come in is the idea of racial. So our ratio is just basically how much debt are you using versus how much are you allowed to use? This is all expressed in ratios.

Utilization Ratio

So let's say that you had a thousand dollars credit card limit. So you were allowed to spend a thousand dollars on your credit card. But you only spent $500 so far. You're at a 50% credit card ratio. This is called a utilization ratio. So you've used 50% of your credit card. If you went up to $750, you'd be using 75% of that credit card.

So the magic number here with the ratios is you ideally want to get your ratios below 30%. The whole world of credit is all based on some math. And when you get to different numbers, your score changes. So if you get your credit score down to 30%, then you're going to start seeing your score increase, and depending on what that balance was and how many of your counts you get down that far is how quickly your credit score is going to rise.

Don't max your credit card

But take a look at all of your accounts, see what the max limit is, and then make sure that the balance is below 30%. Because what these credit card companies don't want you to do is they don't want you to max out all of your accounts. They mainly want to have most of the accounts available as credit. Because if you max it out, what you're telling them is that you're not able to manage debt effectively because you've hit the limit. Because remember credit score is not about how you use money. Credit score is about how you pay back debt.

And so when the amount of debt you use continues to increase the credit card companies and any of the debt companies feel like you're going to have a harder time paying back that debt. So look at all your accounts, make sure they're below 30%.

Increase your credit card limit

Another option is while you're taking those accounts down to 30%, because it might take a few months for you to get there and is also looking at increasing your limit. So if you're in good standing with the accounts that you have, you can contact them and ask them to raise your limit. Because it works the same way.

If your credit limit is right here and the amount you've used this here you can drop it down to 30%, but at the same time, you can also increase the limit, which is going to accelerate you getting to the 30% mark a lot quicker.

Golden Rule #3 Accounts

So we talked about paying on time. We talked about ratios getting below that 30% and now finally it accounts. With accounts we're managing the accounts that we have right now. So the best way to do that first is go on a site where you can get your free credit report and take an inventory of the accounts that are on there. So see what accounts you have.

Make sure they're in good standing. If you have any accounts that have fallen behind, or you've missed payments on, or you have a collections accounts, contact those companies and see what kind of arrangements you can make to just add some more clarity in good standing to those accounts and make sure you're caught up on payments, and you don't have anything outstanding on those accounts.

In your account, section two, this is also where you want to clear up any errors or derogatory counts or collections, make sure that you're working on getting those paid and taken care of.

Importance of age of credit

Also in the accounts is where we're managing the age of our credit. So this is a weird factor that goes into your credit score is how old your credit is. Because again, keep in mind, credit score is a judgment of how well you pay back debt. And so the longer that you've had credit, the longer that you've had debt, the more of a history that you have with all these companies and they feel better about you being able to use credit, cause they've been able to see your actions over a longer period of time.

So your credit score in general will be higher. If your average age of accounts is older than someone who has newer. So this is often why you might see when you're first trying to create credit or anybody who's younger and is just beginning to have debt.

Their credit scores are going to be near the lower end and it's hard for them to get really high in the high sevens height, mid eight range because they just don't have any old accounts. The accounts that they might have only been one to three years. So the longer that your average age of accounts is, the better your score is going to be because your age of accounts is a big factor in your credit score.

Don't just close an account

So in this, when you're managing accounts, when you pay something down, it might be super exciting to say, let's close the account, let's tear everything up, let's throw it in the trash and forget about it. But what will happen is if you close an account, let's say you've had an account and it's been a credit card and you've had it for five years and you're excited to pay it off, and you finally put that final payment in there. You paid it off. It's all done. And then you close it. So you just took away five years of credit history from reporting on your credit report. It's still going to be on your credit report, but that five years isn't going to be taken into account because it's closed.

It's going to decrease your average age of accounts. So if you have accounts, don't pay them down all the way if they're like a credit card, if it's something like a loan, like a car loan, just pay that one off. You don't have to leave a small balance on it, but for credit cards and any revolving credit, just keep a very small balance on it. If you want, you can keep a dollar on it and just let it sit. It's not going to collect that much interest, a couple of pennies to make sure that you keep those. accounts open.

Recap

So to recap, you want to keep in mind three things for building and maintaining credit. Number one is time, make sure that you're paying on time.

If you're behind, you need to catch up. Contact the credit company that you're behind with to catch up, make sure that you're on time. Number two is your ratios, okay? Work towards paying down that or increasing your credit limit so that your credit used is 30% or less. With all of your accounts and then finally is managing accounts.

If you have any derogatory accounts or. Get those fixed as soon as possible. Again, I'll have a guide in the description for you that helps you out there. And then also don't close accounts. Make sure that your average age of accounts doesn't change by just maintaining the accounts that you have. Okay.

Hopefully this added some clarity to credit can be remarkable. And overwhelming. But just continue working at it. If you have questions, contact a mortgage advisor and see where you're at and the plans that they have to help you build credit so that you can purchase a house and do it with the best interest rate possible.

All right. If you have any questions, let me know in the comments. And I'd love to help you out and talk to you soon.

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