How To Build Credit To Buy A House

April 21, 2022

Real Estate

How To Build Credit To Buy A House

You made a goal of buying a home of your own one year from now. Before you could even look at houses, you know you must first get your personal finances in order. Ideally, you should put away around $60,000 or 20% of the typical purchase price for the downpayment and apply for a mortgage pre-approval. 

You still have a lot to learn from the home buying process, but you understand that you need to build credit to buy a house and earn the pre-approval of mortgage lenders. 

How long should you build credit to buy a house? Fortunately, you have time on your side. Six months to a year is optimal for building credit to buy a house. 

What is the best way to build credit? Find the steps to build credit to buy a house below.

Pay Down Your Existing Debt

No one expects you to pay off a massive amount of debt like your student loan or auto loan right away. It’s more realistic to pay down your debt instead. Pay significant and ontime payments towards the principal of your debts whenever you can. As the outstanding principal declines, so will your monthly interest amount. 

Home loan lenders will see your consistent payment history and likely conclude that you are ready to take on mortgage payments as you near paying off your other debts. 

Credit Cards

According to the Federal Reserve, Americans’ debt reached an astounding $998.4 billion in July 2021. This amount is mostly credit card debt. Credit cards are so entrenched in our way of life that any credit utilization or lack thereof can affect your score. 

If you don’t use your credit card, the bank will flag your account as inactive, negatively impacting your credit score. It could go from “good” to “poor” overnight.     

Use this seemingly ordinary piece of plastic to improve your credit score instead: safely charge items to your credit card, then make punctual payments or pay off your credit card loan entirely every time to help you build credit for a house. 

Car Loans

Need help with credit to buy a house? Financial experts suggest using the debt snowball method to free your credit history and to help you build credit fast to buy a house. A credit history with a light debt load, few credit lines, and a record of timely payments is most attractive to lenders. 

The snowball method is an effective strategy to tackle enormous debts such as car loans. The idea is to pay off your smaller debts so that you can allocate the funds for those later to pay down and eventually pay off huge debts like a car loan.  

Installment Plans

Another way to fix credit fast to buy a house is by managing your debt to income ratio (DTI). To compute the DTI, add all your recurring monthly debts (credit cards, student loans, auto loans) and estimated monthly mortgage payment, then divide it by your gross monthly income.

The lender will likely approve your application if you have plenty of room for the mortgage payment. This means paying off the other recurring monthly debts, such as monthly subscriptions. 

Keep Credit Balances Low

Keep your eyes on the prize and make conscious financial decisions to empower you to buy a house. Avoid maxing out your credit limit and always hold a steady income stream. 

Paying off debts is only half of the equation; building your credit also entails proving you have a stable source of income. Lenders will look into your current assets and employment history to see if you can afford to make the monthly mortgage payments.  

Create And Stick To Realistic Budgets

As early as now, you can simulate paying the monthly mortgage by setting aside an amount for that in your budget if you’re not yet renting. And it’s not just the mortgage; there’s the new furniture & appliances and the emergency repairs you have to build funds for. Practicing to budget this way will enable you to have a bird’s eye view of your finances as a future homeowner, and you can better prepare. Perhaps a higher-paying job or side hustle can ease some of the burden.

Remember to live within your means while allowing funds for fun activities and personal purchases. 

Set Up Autopay On Bills

Have good credit by paying each recurring monthly debt and bills on schedule. A missed payment can count against your credit. 

You can easily set up automatic payments for your credit card debt and utility bills online or at your bank. Setting up autopay on your primary account lessens your worries so you can focus on income generation or future house-hunting. 

Report Errors On Credit Report

Prevent errors on your credit report by regularly running it with the three major bureaus. Notify your creditors and the right bureaus when there’s any discrepancy, and be ready to send supporting documents via certified mail. 

Upon correction, call the credit reporting agencies to have the erroneous accounts removed. Don’t let these accounts linger, as lenders require resolving them before applying for a mortgage. 

Review the enclosed analysis in your credit report and work toward a higher three-digit score when your credit score is not as high as you would hope.

Credit Cards At Your Bank, Not Department Store

Lenders prefer for payees to be the authorized users of a reputable bank card than keeping a balance on a store credit card with higher interest rates.

Creditors also take it as a good sign when you use your credit card to pay off essential items such as groceries and gas rather than spur-of-the-moment luxury items. It’s telling of your spending habits.

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