Buying a home can open up a world of possibilities for the future, especially if you’ve been stuck in the rent game. Instead of your money disappearing into rent payments each month, you can start building equity in a home of your own. But to make this all happen, you’ll need to do things like save up money for a down payment and ensure you have a good credit score.
Research demonstrates that individuals in the LGBTQ+ and BIPOC communities often face additional challenges when it comes to securing loans. For example, the typical LGBTQ+ individual has a lower credit score than their cisgender or heterosexual peers, and Black individuals have scores that are 100 points lower than white cohorts.
If you’ve struggled with your credit in the past, improving your credit score to prepare for a mortgage can take time and strategic planning.
Analyzing Your Credit Report
A credit report is essentially a summary of your history as a borrower. Throughout your life, you will likely acquire multiple types of debt. Your ability to pay back that debt on time is reflected in your credit report. A higher credit score means you have a good history of making on-time payments to debtors. A low credit score could mean you’ve struggled to make payments, or it could simply indicate you don’t have a very long credit history.
A credit report analyzes numerous data points to calculate your credit score. These factors include:
Length of credit history
Number of open accounts
Number of missed payments
Types of debt
Revolving utilization of credit cards
Credit Inquiries
Amount owed
Debt-to-income ratio
Obtaining Your Free Credit Reports
Seeking a free credit report is the first step in your journey toward becoming a homeowner, but unfortunately, not every consumer is aware of how important this is. For example, only 84% of LGBTQ+ consumers know their credit score, which can put them in trouble when they start house hunting.
By knowing where you stand, you can better understand what needs to be done to achieve your homeownership goals. You can receive a free credit report each year from one of the three major credit bureaus: TransUnion, Equifax, and Experian.
Credit scores can vary depending on which credit bureau you use and their credit score calculation method, so it’s helpful to know which credit scores lenders use to evaluate loan applications. Most mortgage lenders rely on data from the Fair Isaac Corporation, otherwise known as FICO, for your final credit score.
Reviewing Your Credit Reports for Errors
An inaccurate credit report could hamper your ability to get a competitive interest rate for your home loan, so check your credit report for inaccuracies and report any that you find. You can report errors by connecting with the individual credit bureau that calculated the inaccurate report.
For example, if you know you’ve always paid on time, but the report states you made some late payments, you can use evidence to dispute the error and fix your score. To make a successful revision, you’ll need to explain the error and provide supporting documentation.
Strategies to Improve Your Credit Score
Long before you start thinking about taking out home loans, you should be working on improving your credit score because this process can’t happen overnight. Here are a few tips to improve your credit score so you can qualify for better mortgage loans with lower interest rates.
Payment History: The Most Crucial Factor
Consistently making payments on time is the best way to take care of your credit score. Even one late payment can seriously damage your score and make it challenging to access loan products.
Make sure you never make late payments on any of your accounts by setting up automatic payments. Most credit card companies allow you to set up alerts or even change your due date if necessary. You may also choose to set up alerts for all your accounts by using a personal finance organizer.
If you have any past-due accounts, submit all late payments as quickly as possible. One missed payment can drop your score suddenly and take a long time to repair.
Credit Utilization Ratio
Credit utilization refers to how much of your available credit limit you use on your revolving credit accounts, such as credit cards. The higher your credit utilization rate, the more likely your credit score is to suffer.
Aim to keep your credit card balances low by consistently making monthly payments. Better yet, try to pay off your credit card balance in full each month to avoid maxing out your credit line and racking up interest. If you only ever make your minimum payment each month, you will accrue debt and interest.
If you want to boost your credit score quickly, request to raise your credit limits without changing how much you spend each month. This will drop your credit utilization ratio right away, thereby improving your credit score.
Length of Credit History
About 16% of Black and Hispanic individuals are “credit invisible,” meaning that they have no credit score that can be used to access financing. LGBTQ+ individuals also may have faced challenges that make it difficult to open accounts, such as homelessness or disability. Because lenders see a longer credit history as proof that you’re more responsible, it’s essential that you open up a credit file well before you begin to apply for home financing.
If you do not have any credit accounts, consider getting a credit card as soon as possible to begin building credit. The length of your credit history has a significant impact on your score, and borrowers with only a few years of debt history start out with very low scores. Credit reports favor older accounts because the borrower has had more time to demonstrate their ability to repay debts.
To maintain your history, avoid closing old accounts unless absolutely necessary. You can also become an authorized user on a credit card account of someone who is very responsible with making their payments, as this can add to your credit history and boost your credit score as well.
Credit Mix
The more diverse your credit accounts are, the better your score will be. A good mix of loans, credit cards, retail cards, and other sources of debt will help your score improve over time. However, be sure not to open several new credit accounts all at once in the name of diversifying, as this will likely hurt your score.
Hard Inquiries
A hard inquiry occurs when a potential lender or creditor evaluates your credit report to assess your risk as a borrower. Typically, a hard inquiry will only cost you 5-10 points on your FICO score, but the impact can take 1 to 2 years to disappear. Hard inquiries are unavoidable when opening new credit cards, car loans, personal loans, or other installment loans, so avoid applying for too many new accounts at once.
It’s also important to avoid applying for credit cards or loans for which you are unlikely to be approved. Whenever possible, pursue pre-approval, which does not require a hard inquiry, before submitting an official credit or loan application.
Additional Tips for Credit Score Improvement
The strategies listed above are the primary methods to improve your credit score. However, there are other ways to protect your credit score and avoid penalties, improving your chances of getting a good mortgage loan when the time comes.
Setting Up Fraud Alerts and Credit Monitoring
Monitoring your credit is important in case of fraud attempts or report errors hurting your credit score. Many credit card companies and lenders offer fraud alert systems that notify you if there is an issue with your credit card or loan payments. Take advantage of these features to ensure you do not become a victim of fraud, which can lead to an uphill battle to restore your credit score and protect your identity.
Building Credit with Alternative Data
Credit scores can also be improved through alternative means. For example, if you pay rent to live in an apartment, your rental payment history could be used to build credit using alternative data. Income data can also be used in the absence of strong credit scores, for which you may need W-2s or bank account statements. If you have a very short credit history, credit builder loans can allow you to make small payments to increase your credit score fast, with many of these loans amounting to just $300 to $1,000.
Seeking Credit Counseling
The average American has approximately $6,270 in credit card debt, but this varies significantly by race. While Black and Hispanic individuals have less credit card debt, they also have fewer revolving debt accounts, which can put them at a disadvantage when they’re trying to build up a higher score.
Additionally, individuals from marginalized communities are more likely to declare bankruptcy, which impacts a person’s FICO score for up to seven years. Individuals from ZIP codes with a large Black population are more likely to file for Chapter 13 bankruptcy due to high debt.
While this poses significant challenges when it comes to purchasing a home, this does not make it impossible for you to get a loan, especially if you rely on professional help.
When in doubt, seek advice from a professional to improve credit scores. A financial professional can help you understand what impacts credit scores, how to improve them, and what it takes to maintain strong credit. They can also educate you about important laws and regulations like the Fair Credit Reporting Act. Credit counseling and education can help you learn about debt management to avoid the trap of incurring too much debt and not making timely payments.
When to Start Improving Your Credit Score
As mentioned before, time is an important factor when credit bureaus are continually evaluating your credit rating. The longer your history is, the more likely your score is to climb, making it easier to get a conventional loan or other type of mortgage when you’re ready to buy a home. The effect of a credit score on a mortgage is massive, so the sooner you start improving your credit, the better your homeownership prospects are.
Planning Ahead for a Mortgage Application
The best time to buy a house varies based on market conditions and personal factors, but you should ideally be looking at least a few years down the road. That will give you ample time to start paying bills on time, increasing your gross monthly income, and reducing your debt-to-income ratio. You’ll also have time to space out credit inquiries, such as opening auto loans or new cards, so that they don’t adversely impact your score when you’re ready to purchase.
The more time you spend incorporating these strategies, the higher your score will be when it comes time to apply for a mortgage.
Working with a Mortgage Lender
As your FICO score improves, it’s time to start choosing the right lender for your mortgage loan. The right lender can help you understand what your options are for mortgage products and interest rates, making the mortgage process a little easier to navigate.
In addition to working with a lender (the bank that will provide you with the loan to purchase your home), you should also consider working with a mortgage broker.
Brokers can help you navigate the process of pre-approval and other lesser-known aspects of the application process. Getting pre-approved for a home loan is a wise strategy because it will allow you to act faster than other borrowers who are not pre-approved, making the home-buying process faster in a hot market.
At Pride Lending, we’re committed to helping improve homeownership rates amongst marginalized communities. For example, only 46% of LGBTQ+ individuals own their own home, and homeownership rates are lower amongst Asian, Hispanic, and Black consumers than their white counterparts.
This has to do with the fact that mortgage companies may unfairly deny certain consumers, even though the Fair Housing Act is meant to protect marginalized individuals from discrimination. Mortgage approval rates for same-sex couples were 3 to 8% lower than for heterosexual couples, while 1 in 4 applications from Black buyers are denied.
By working with a mortgage broker like Pride Lending, you’ll be sure you have an ally at your side to face these challenges. We’ll ensure you have all the information you need to succeed and purchase the property of your dreams.
Conclusion
A higher credit score is your best bet for landing a great mortgage with a low interest rate. A few points here and there may not make a huge difference to most lenders, but you should plan ahead to improve your financial health by building a higher credit score. Maintaining low balances, being aware of how much credit you have, evaluating credit risk with every new account, paying bills on time, and never missing credit card payments will keep you on track to increase your FICO score.
When you need to choose the right lender for your mortgage, Pride Lending is ready to offer the insight you need to find the perfect mortgage option for your dream home. We will work together to discuss your FICO score and how it affects your prospects for a mortgage.
Pride Lending is committed to helping borrowers from all walks of life to access financing for their dream home. Our team is made up of allies and members of marginalized communities, including the LGBTQ+ and BIPOC communities; we’re familiar with the challenges that you may face when attempting to purchase a home and will serve as your advocate throughout the process.
We work with borrowers who have both low and excellent credit scores. Start a loan application today by signing up, or call us at 725-231-0192 to start the conversation.
FAQs
Can you get a mortgage with bad credit?
If you want a conventional loan, your best shot at being approved is with a credit score of at least 620. However, there are some government-backed programs that accept lower credit scores from borrowers, such as FHA loans and USDA loans.
What factors determine your FICO credit score?
Credit scores are calculated in different ways, but each credit score factor has a basic weight that contributes to the final number. For example, a person’s payment history accounts for roughly 35% of the score, so maintaining on-time payments is crucial. Your total debt owed is about 30% of your score, so try not to accrue too much overall debt. The length of your history is about 15% of the score. New credit accounts are 10%, and the types of credit used account for another 10%.
How quickly can you improve your FICO credit score?
It depends on the strategy you adopt. Most methods will take 6 to 12 months to have a significant impact on your score, with consistent on-time payments being the most important factor. However, some strategies can raise your credit score fast, like raising your credit limit without increasing your spending to lower your revolving utilization rate.
What is the main way to improve your credit score?
The best way to improve your credit score over time is simple: Pay what you owe when you owe it. Don’t let your credit card balances get too high or take on a personal loan for which you cannot afford the payments. Even one or two late payments can drastically hurt your credit report. Keeping up with payments is one of the keys to maintaining healthy personal finances, so don’t give the credit scoring models an excuse to ding your score.
Can I pay someone to fix my credit?
There are credit repair companies that you can pay to analyze your credit reports and file disputes over inaccuracies in the score. However, this could be a waste of money as you could enact the same credit repair plan yourself by filing disputes directly with the bureaus. There is no need to pay someone else to do it unless you do not have the time or patience to do so yourself.
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