Prospective homebuyers seeking a mortgage loan may use several strategies for improving low credit scores. Examples include reviewing credit bureau reports for possible credit account errors, avoiding late payments, paying down debt, and getting a credit builder loan.

Step 1: Dispute Any Errors on Your Credit Report

The first credit repair strategy involves obtaining a current copy of your credit report and reviewing your credit history. The three credit reporting bureaus, Equifax, Experian, and TransUnion, each provide consumers with a complimentary credit history report annually.

Carefully review your credit history for any potential errors that might hinder you from achieving a good credit score. The first option involves directly contacting the lender regarding the potential error on your payment history, such as a credit card company or student loan issuer.

The next option involves filing a dispute with the credit reporting agency regarding the possible erroneous entry. The credit reporting agencies now have simple website applications for disputing potentially inaccurate payment history entries.

If applicable, be sure to upload any documentation that supports your dispute. According to TransUnion, most of their investigations are now concluded within two to four weeks with any necessary updates or credit repairs made on the report shortly thereafter.

Step 2: Pay Your Bills on Time

The Fair Isaac Corporation (FICO) leads the way in the development of models for calculating consumer credit scores. The most heavily weighed factor that contributes to your FICO score is your payment history, which is 35% of the basis for credit scores.

Consumers must strive for making timely payments on all credit card debt, car loans, and other loan types. Mortgage lenders and other institutions that assess new credit applications recognize that a consumer’s past payment history is a good indicator of future behavior.

Borrowers with excellent credit scores who demonstrate a track record of responsibly managing debt will likely qualify for the lowest interest rates on home loans, the best credit card offers, and other preferable types of new credit or loan programs.

Step 3: Lower Outstanding Debt

The second leading factor used in FICO’s credit score formula is the amount of debt owed, which is 30% of the basis for credit scores. Keep in mind that simply having existing debt will not adversely impact credit scores or cause lenders to view you as a poor credit risk.

Generally speaking, mortgage lenders recognize that applicants for a home loan with substantial amounts of existing overall debt may struggle with meeting all their credit obligations each month.  

However, mortgage lenders must also consider the income level of home loan applicants.

A mortgage lender will generally assess an applicant’s eligibility for new credit by comparing their overall amount of debt relative to their income. Further, of greater importance is a mortgage applicant’s credit utilization rate.

Credit utilization rates or ratios are an indicator representing your amount of current debt (owed) relative to your maximum available credit. For example, having a “maxed out” credit card may suggest that the cardholder is experiencing financial problems and is “overextended.”

The formula for calculating a consumer’s credit utilization rate is: 

Credit Utilization Ratio = Total Current Debt / Total Available Credit

According to Credit Karma, lenders typically prefer that a consumer’s credit utilization rate remain below 30%.

Step 4: Get a Credit Builder Loan

Individuals with bad credit that wish to qualify for a home mortgage loan may consider obtaining a credit builder loan. CreditStrong, a division of the Texas-based Austin Capital Bank, is a leader in this creative, surging concept that consumers now use for bolstering their credit.

CreditStrong’s credit builder loans are a type of installment loan, which is a loan category common when financing homes and cars where the loan is repaid over a series of payments — typically each month.

Unlike a standard installment loan, the loan funds are initially deposited into an FDIC-insured saving account where they remain throughout the loan term, which may range from one to ten years.

Each month, the borrower makes an affordable payment toward the loan balance. During this time, CreditStrong regularly reports the loan activity to the three major credit bureaus, which can have a substantial positive impact on bad credit.

After the loan is repaid in full, the borrower has now established a positive credit history and also has access to the loan funds within the savings account, which might represent an excellent down payment on a home mortgage loan.

Consumers with bad credit will qualify for the loan program if they meet some basic requirements:

• 18 years old 
• U.S. resident with a permanent address
• SSN or ITIN
• Checking account, prepaid account, or debit card
• Mobile phone number
• Email address

Step 5: Don’t Close Down any Credit Accounts

Consumer credit reports generally contain key information regarding any current, open credit accounts such as the origination date, balance, and payment status. Most closed or inactive accounts also remain on credit reports regardless of their current standing.

The majority of positive account entries, such as a car loan that was paid in full, will remain on your credit report for 10 years. Most bad credit entries, such as a credit card account that was unpaid and forwarded to a collection agency, will remain on your credit report for seven years.

The following table shows how the two leading organizations calculate credit scores, which includes the aforementioned FICO Score model and VantageScore. 

The Two Credit Scoring Models: Factors and Level of Importance

FICO Score	Importance	VantageScore 4.0	Importance
Payment History	35 %	Payment History	41 %
Amounts Owed	30 %	Account Age & Credit Mix	20 %
Length of Credit History	15 %	Credit Utilization	20 %
Credit Mix	10 %	New Credit	11 %
New Credit	10 %	Balances	6 %
N/A	N/A	Available Credit	2 %

Sources: myFICO; Experian

In many cases, particularly among those with bad credit, consumers should leave existing credit accounts such as credit cards that are no longer used, open instead of formally canceling or closing them for two primary reasons.

The first reason why you might not close an existing credit account involves reducing your length of credit history. An example of this is if a credit card that you no longer use is the oldest entry contained in your credit history.

Another reason involves the possibility of increasing the aforementioned credit utilization rate. This would apply primarily to a credit card account without a current balance, as closing the account would reduce the overall available credit.

Step 6: Don’t Open Any New Accounts

One section of your credit report is designated for listing any new credit inquiries. A credit inquiry occurs when someone, most commonly a prospective lender, views your credit report information.

For example, if you submit a mortgage loan application to a lender requesting financing for the purchase of a home. Here, the lender must assess your creditworthiness; therefore, the financial institution will access your credit report for review.

Credit inquiries or “credit checks” are differentiated as either hard inquiries or soft inquiries. A hard inquiry results from a lender or other third-party accessing your credit report for purposes of making a lending decision, such as if you applied for a new credit card account.

A party that conducts a hard inquiry must first obtain permission from the applicant (prospective borrower). A hard credit inquiry results in a credit report entry that typically remains visible on a consumer’s credit history for two years and may slightly lower your credit score.

According to Equifax, a soft inquiry occurs when a consumer checks their own credit report, when an existing creditor performs a check, or when credit card companies generate marketing or promotional activities.

Unlike a hard inquiry, soft credit inquiries do not create credit report entries that are visible to prospective lenders and do not impact your credit score.

Lenders may interpret multiple recent hard credit inquiries unfavorably, as it might indicate the consumer is experiencing unforeseen financial problems.

Those seeking to improve their bad credit history in efforts toward qualifying for a home mortgage loan should pursue a comprehensive strategy.

The best practices include disputing any errors on your existing credit report, paying all existing accounts on time, reducing overall amounts of debt, obtaining a credit builder loan, and limiting multiple hard credit inquiries.

FAQs

What is the Fastest Way to Fix Your Credit Score?

Several credit repair tactics may improve your bad credit history in roughly 30 days or less. 

Three of the fastest methods include reducing your credit utilization rate, correcting any errors on your credit report, and requesting the removal of already paid off negative credit report entries.

The formula for calculating your credit utilization rate is:

Credit Utilization Ratio % = Total Current Debt / Total Available Credit

TransUnion states that consumers should keep their credit utilization rate below 30%. Reducing your credit utilization rate involves either promptly paying down your current credit card account balances and/or asking the credit card company for a higher credit limit.

Obtain current copies of your credit report and review them for any potential errors hindering your credit. Studies show that approximately 25% of Americans notice errors when analyzing their existing credit history.

While reviewing your credit report, identify any negative entries such as late payments or collection agency accounts that were paid off. Contact the lender or collection agency who reported the account to the credit bureau and ask to have the entry removed.

What is the Best Credit Score to Buy a House?

According to Experian, consumers with a credit score of 750 will likely qualify for the “most favorable” mortgage loan interest rates.

No “universal” minimum credit score requirement exists throughout the various lenders and mortgage financing programs in the market today; however, those with bad credit will usually struggle in qualifying for loans with the lowest interest rates.

Applicants seeking a conventional mortgage loan usually need a 620 or higher score along with fairly stable employment and income histories.

Through government incentives such as with FHA and VA loan programs, lenders may offer home mortgage loans to borrowers with scores between 500 to 580 in many cases.

Recent data shows the national average annual percentage rates (APR) for home mortgage loans according to the borrower’s FICO score. You will notice how those with the best credit scores obtain the preferred rates.

• 760 to 850: 4.77%
• 700 to 759: 4.99%
• 680 to 699: 5.17%
• 640 to 659: 5.81%
• 620 to 639: 6.36%

Individuals pursuing a mortgage should keep in mind that other factors may influence lending decisions. For example, having a significant amount saved for a down payment may help offset mediocre credit, as this upfront cash reduces the lender’s risk.

How Long Will It Take to Repair My Credit?

Repairing a bad credit history may take several months to a few years based on the circumstances. For example, the damage to a credit score caused by a single late payment is much less significant compared to bankruptcy, which can cause a drop of 200 points or more.

Adverse credit report entries such as late payments, collections, and Chapter 13 bankruptcy remain visible for seven years, while a Chapter 7 bankruptcy extends to 10 years before removal from your credit history.

Consumers seeking to accelerate the process of rebuilding their credit should put a multi-faceted strategy in writing that involves taking action toward minimizing the impact of existing negative credit entries and proactively improving their credit moving forward.

First, obtain current copies of your credit report from the three major reporting bureaus and promptly dispute any potential errors that might exist. Next, pay down the balances on any existing credit card accounts, which will improve your credit utilization rate.

Also pay all current bills on time. Consider setting up automated reminders or enrolling in “autopay” options that send payments electronically from your checking account.

Then begin establishing a new, positive credit history by obtaining a credit builder loan or a secured credit card.

CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.

Start Building credit today