You believe owning a home is in your future. It’s the American dream. But a lender has other ideas. That’s because lenders don’t think about the American dream; they think about the three numbers that indicate whether you’ll qualify for a loan. Those three numbers are your credit score.

Credit scores are largely determined by your credit history, and you can view that history on your credit report. The report offers a snapshot of your financial life – if you paid your bills on time, missed payments, and any other little blemish that has occurred over the years.

The experts at myFico, (Fair Isaac and Company), the largest of the companies that provide software for calculating a person’s credit score say, “Even minor discrepancies in your credit reports can impact your scores negatively – and potentially the mortgage loan interest rate you might qualify for.”

That’s why fixing those mistakes is so important. It could be the difference between getting approved for a loan you can afford and one that would dash your dreams. But don’t give up hope! There are solutions that can improve your chances of qualifying for a mortgage.

Step-by-Step Credit Repair for Home Loan Approval

Repairing your credit to secure the rates and terms you want on your next home loan

First, get your credit reports to review them for errors

Fast credit repair for a mortgage first begins by ordering your credit report. Order the copy from all three credit reporting agencies. You can find them here at AnnualCreditReport.com. If you haven’t ordered a report in the last year, the copies will be free from all three companies.

Once you receive your reports, set aside some time because you should go over every entry on each report. Make certain everything is accurate. Things to review include:

  • Your correct name
  • Social Security number
  • Current and previous addresses
  • Debts and other transactions
  • Public records
  • Your list of employers

If you find errors, you must act quickly. These errors could be ruining your credit score. The errors may be a simple fix, but they may also represent identity theft or credit fraud.

Next, dispute errors to correct the information in your report

Do you know how to read your credit report?Write a letter to the credit reporting company. Include copies, not originals, of the supporting documents. The Federal Trade Commission says, “Your letter should clearly identify each item in your report you dispute, state the facts and explain why you dispute the information and request that it be removed or corrected.” The FTC offers a sample letter for easy reference.

Send the letter by certified mail with “return receipt requested.” This allows you to know exactly when the letter was received. The bureau has 30 days from the day they receive your complaint to verify the information. If it cannot be verified, it must be removed.

Next, write another letter to the company or organization (such as a credit card company), that provided the information to the credit reporting company. Once again, include copies of the supporting documents.

You can go through this process yourself or use a professional service geared for mortgage approval. With this second option, you receive a professional opinion to point out things that might raise flags. Some services will even coach you on how to achieve better credit before you start the application process.

Let Debt.com connect you with experts that provide fast credit repair that can get you mortgage-ready in no time.

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Finally, evaluate where your credit stands

If you don’t want to pay for your score, it’s helpful to simply know how the companies calculate your credit score. FICO credit scores range from 300 to 850. Your credit score is calculated using five factors, which are broken down by percentages. They are:

  1. Payment history: 35%
  2. Outstanding debts: 30%
  3. Length of your credit history: 15%
  4. Types of credit you’ve used: 10%
  5. Amount of new credit: 10%

Paying down your outstanding debts, making payments on time, and having a healthy credit history will reflect positively on your credit score. If you score 650 or less, you may qualify for a loan, but it will be a higher interest loan.

You can guesstimate where your score stands based on how many negative items are in your credit report. If you don’t have any negative items remaining after credit repair, your score should be good. If you have a lot of negative items left after going through the credit repair process, your score will be lower.

You may also decide to sign up for a credit monitoring service. This will tell you where your score stands now. Most services also give you tips on how to raise your score. This can help you build credit before you apply for a mortgage.

Tools like SmartCredit® can give you everything you need to improve your credit

If you’re getting ready to buy a home, a paid credit monitoring tool, such as SmartCredit, can be a big help. Unlike free monitoring tools like Credit Karma, which mainly track your score and offer you credit cards to fit your profile, paid tools like SmartCredit offer features that help you improve your score.

The Smart Credit Report® feature flags information in your credit report that’s could be negatively affecting your score. If you believe these items are errors, it offers action buttons that facilitate making effective disputes directly with the creditor.

It also offers action buttons to request a “good faith” correction from a creditor. These basically ask the creditor to correct the information based on your good history as a customer.

So, for example, let’s say you incurred a missed payment due to a technicality or extenuating circumstances. The creditor might agree to update your credit history to remove the missed payment notification if you acted quickly to correct the issue.

In addition, SmartCredit provides a ScoreBuiler™ feature that offers video instructions for improving and building credit over the next 120 days. This would help you achieve a better score within six months.

Try SmartCredit free for 14 days to see how it can help you become mortgage-ready.

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Best Way to Apply for a Mortgage

Buying a home is not like buying a car. You don’t just find the model you want and make a deal with the salesperson. You must prepare yourself and your finances first. If you don’t take the necessary steps, you may not qualify for a mortgage. Or, if you do, you might only qualify for one with unfavorable terms.

Educate yourself on the best way to apply for a mortgage and you might find your dream home along with a deal you can truly afford.

8 steps to take to get mortgage-ready

Step 1: Gather all the necessary items for the lenders Two to three months of recent pay stubs Two to three years of tax filings (W2’s, 1099’s) At least three months of bank account statements
Step 2: Review your credit history and score Get a free copy of your credit report. Review your report, check for mistakes and fix all errors. Evaluate your credit score to determine what types of mortgages you’ll qualify for.
Step 3: Prepare for a down payment Cut expenses as much as possible. Automate a savings account for the sole purpose of saving for a mortgage. Prepare to have the ideal down payment of 20%.
Step 4: Understand how much home you can afford Think about spending no more than 28 percent of your gross income. Pay off other loans and don’t take out loans while you are in this process. Review your expenses.
Step 5: Assess the housing market Find the neighborhoods where you can afford a home. Speak to a real estate professional about the market. Compare condominium prices, townhouses, and single-family homes.
Step 6: Raise your credit score and pay off debt Check your debt-to-income ratio. Refrain from taking on any new credit. Pay off any balances that are within reach.
Step 7: Get pre-approved for a loan, if possible Contact mortgage lenders. Supply all necessary paperwork. If pre-approved, carefully review document for interest rate and how much they’re willing to lend. Do not overspend on a mortgage.
Step 8: Avoid spending on big-ticket items Even if you’re pre-approved, do not spend on furniture or other items Keep your spending at a minimum, as the banks will monitor your spending. Avoid large cash expenditures. The bank may ask for additional bank statements.

Be diligent to achieve your dream

As you see, getting ready for mortgage approval takes time and patience. The process is arduous, but not impossible. If you follow these steps, keep a close eye on your credit report, reduce your spending and build credit, you could live the American dream. But always remember one thing, just because you may one day qualify for a mortgage, it doesn’t mean you can automatically afford it. Review your finances and make the best decision that fits within your budget!

Mortgage-Ready Credit Repair Questions

Q:Is it possible to get a free credit report?

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A: Yes. If you haven’t ordered a copy of your credit report within the past twelve months, you can download it for free. Make sure to order one copy from all three credit reporting agencies. You can find them here at AnnualCreditReport.com.

Get more information about free yearly credit reports »

Q:How can I raise my credit score?

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A: There are many ways to raise your credit score. They include:

  • Maintaining low balances on credit cards and other lines of credit
  • Paying off your debt instead of moving it to one low interest rate card after the another
  • Checking your credit report for errors and fixing them
  • Always pay your bills on time and avoid missed payments (payments that are more than 30 days overdue)
  • Avoiding actions that can damage your score, such as closing old accounts

Find practical tips on how to build credit »

Q:What’s the lowest credit score to get a mortgage?

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A: For most conventional fixed-rate mortgages, you will need a credit score of 620 or higher. Adjustable-rate mortgages generally require credit scores above 600. However, there are FHA loans that first-time homebuyers can qualify for, even with scores as low as 500. If you can put down a 10% down payment, you can qualify for an FHA loan with a score as low as 500. If you want to take advantage of FHA’s 3.5% down payment, then you need a score of at least 580.

Learn how to buy a home with bad credit »

Get step-by-step instructions to improve your credit, so you can become mortgage-ready with SmartCredit.

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Article last modified on August 25, 2020. Published by Debt.com, LLC