Tips to improve credit or reduce debt when looking to buy a home

Two factors that affect your home loan eligibility are credit score and DTI ratio. A high credit score and a low DTI ratio can increase your chances of qualifying for a home loan. Let us look at some tips to raise your credit score before moving on to some debt-reduction methods.

How to improve your credit score before buying a home

One of the first stages of financial stability is building your credit, which is essential if you are considering purchasing a home. You'll spend less interest overall on your home if you have good credit because it will enable you to obtain a mortgage at the best rate. Here are some tips to help you build credit before buying a home.

1. Check your credit report and score

Before you buy a home, it's crucial to be aware of your credit score, debt-to-income ratio, and overall financial health. To begin with, familiarise yourself with your credit report and score. Annually review your credit record, and if you find any errors, fix them right away.

According to an FTC study on Americans' credit ratings, one in four people discovers inaccuracies in their credit files. Creditors frequently make reporting errors, which results in inaccurate credit scores.

For instance, even though you may not have ever missed a credit card payment, another person with the same name as you has failed to make a payment, and your bank accidentally recorded the error on your credit account.

For this reason, running a free credit check is crucial, and searching for any mistakes might lower your credit score. By contacting the credit reporting agencies (Equifax, Experian, and TransUnion) and providing evidence that the credit information was incorrect, you can have any inaccuracies you notice in your credit report corrected. The credit bureaus will fix your credit report, which will be reflected in your credit score.

How long will it take to raise your credit score? An identity error, such as a credit card, not yours appearing on your credit report, may usually be corrected within one to two months. Since you'll need to get in touch with the credit bureaus and your credit card business if it's an issue with your credit card account, it can take longer to appear in your credit score. It may take up to three months for this error to be corrected, removed from your credit report, and considered when calculating your credit score.

2. Take advantage of the fact that you are a tenant

If a landlord can confirm your regular rental payments, you can use your rental history as a credit reference when you submit a mortgage application.

Consider using a check or debit card to pay your rent so that your bank statements will show evidence of the transaction. Additionally, try to settle down rather than move from one apartment to the next. Your credit report will reflect this stability, and creditors will view it favorably.

Using Experian's free Experian Boost program, you can add your utility bills payment history from your phone to your credit report. Using this program is an excellent approach to improve your score if you don't have much credit history and are interested in learning how to build credit quickly.

3. Keep your credit balance low

Even if you've never missed a payment, maxing out your credit card could damage your credit score. If you carry a balance, we advise limiting it to no more than one-third of your available credit.

4. Make automatic payments

You may ensure you don't miss a payment by taking a straightforward action like setting up an automated payment on your credit card bills. Your credit score may suffer if a missed payment shows up on your credit record.

5. Become an authorized user of an old credit card

Have a trustworthy spouse or relative who consistently makes on-time credit card payments? You can benefit from their excellent credit history by adding yourself as an authorized user on one of their credit card accounts.

The whole history of the other account appears on your credit report immediately. And when this more established, older credit account is added to your payment history, the average age of the accounts you've "managed" rises, raising your credit score.

Just be cautious to ensure that the person you select genuinely pays his bills on time and maintains the debts low because bad credit history will also be visible, just like good credit history.

6. Obtain a secured loan or credit card

Try applying for a secured credit card, which is "secured" by a deposit, if you're having difficulties getting approved for a standard credit card. This implies that your deposit will be used to settle the account if you stop making payments or default. This reduces the risk for the lender, increasing the likelihood that it will provide you credit even if you don't have a credit history.

Your credit score should increase within a month to two months.

7. Get a new credit card

Getting a new credit card can help you raise your credit score in two ways.

First, your credit usage should improve if you open up a new card, which boosts your overall outstanding credit line."

Second, having more than one sort of credit card or small loan can improve your "credit mix," phrase credit agencies use to describe a person's capacity to manage various credit accounts.

Depending on how quickly your new account is processed and reported, it could take one to six weeks for your credit score to increase. Be careful not to overextend yourself; start by opening one new credit account. Your credit score will suffer a series of injuries if you apply for a card every time you are asked if you want 10% off your purchase.

3 Tips to reduce your debt before buying a home

Lenders use your debt-to-income ratio (DTI), a mathematical calculation, to assess your finances and credit score.

Your DTI evaluates how much of your income is going toward debt payments. Mortgage lenders use your DTI to assess your ability to make monthly mortgage payments. A low DTI is beneficial since it indicates your debt-to-income ratio is healthy, and this high percentage can show you are in unhealthily high debt levels.

If you want to buy a home, you must reduce your debt. Lenders are less likely to offer you a loan if your DTI ratio is high.

Here are a few tips to help you reduce your debt burden.

1. Make a plan to reduce your debt

Decide how long it will take to repay debts and the sequence in which you intend to do so by looking at your income and budget. While paying more than the minimum on your other bills, try to pay off the debts with the highest interest rates first.

Call 800-530-OVLG to learn various debt relief strategies from Lyle Solomon's assistants. They can suggest strategies like debt settlement, debt management, and debt consolidation to reduce your DTI ratio based on your financial situation.

Deb settlement becomes an option only after you have numerous missed or late payments and maybe collection accounts. If there is reason to think you could pay the entire amount you initially agreed to, a creditor or collector won't accept less than you owe.

Companies specializing in debt settlement work with creditors to lower your debt, primarily for unsecured debt like credit cards. Debt settlement only works when it appears you won't pay anything and cease paying your debts. You create a savings account and deposit a payment every month. Once the settlement company determines sufficient money in the account to support a lump-sum offer, it bargains with the creditor to agree to a lower amount.

Debt consolidation is the process of combining several debts into one. You consolidate your monthly payments into one from a single lender, ideally with a lower interest rate, instead of making separate payments to several credit card issuers or lenders monthly.

Several debts can be combined through debt consolidation, including:

  • Payday loans
  • Credit cards
  • Medical bills
  • Unsecured loans

A debt management plan makes it possible to pay off credit card debt by combining your debt at lower interest rates and offering budget-friendly monthly payments.

2. Pay more than the required minimum

If you merely make the minimum payments on your credit card balances or loans, you'll accumulate debt and pay more interest on the things you've bought. If it's not possible, make as much progress as possible toward paying off the entire balance on each credit card each month.

3. Pay off your debts with a smart budget plan

Yousaf Saleem, from USTitleLoans, said always create a realistic budget plan to estimate your earnings and expenses when buying a new home. This method will stop unnecessary spending and help you improve your credit and reduce your debt. Tracking your income and expenses is excellent and gives you a clear picture of your financial journey.


Boye Fajinmi from TheFutureParty said, "common sense on fewer accounts are easier to manage. If you're in the process of improving your credit by paying off your debts, you may be tempted to close out an account you've paid off. This can actually be detrimental to your efforts. When reviewing your application, money lenders look for a ratio of available credit vs. credit. Having more available credit with a low use rate benefits your efforts to get a home loan.

So, even once you've paid off those extra lines of credit, keep them open at least until after you've secured your loan. They'll always be time to consolidate your debt later."

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