How to Fix My Credit to Buy a House

Finding the perfect home remains the American dream, but finding someone to lend you money for that home can be a challenge.

Denial rates for mortgage approvals grew significantly in 2024. Almost 21% of applications were denied, an almost 75% increase from 2023.

In some cases, the disapproval was because consumers didn’t check their credit score before they searched for a home.

If you want to know what kept you locked out, ask the bank, credit union or online lender where you applied. If their reply includes negative remarks about your credit score, don’t fret. Rebuilding your credit score is something you can make happen. It will take time and discipline and perhaps sacrifice, but as your credit score rises, so does your ability to borrow money on friendly terms.

Nearly everyone can improve their credit if they face the challenge honestly.

Repairing Your Credit Score

If your goal is to undergo credit repair to buy a home, start with the basics. Fundamentals matter in developing a good financial status and history.

What are the basics? Pay bills on time. Pay in full. Don’t spend more than you earn. Control impulse spending. Be responsible. Be diligent.

How Does Credit Work?

Credit means you are able to borrow money to pay for products and services and you promise to repay it in regular installments. Lenders judge your credit based on your history of paying debt, and that history is reflected in a credit score.

A credit score provides insight into how well you pay your bills, which helps predict how well you will repay a new loan. A credit score will show if debts are paid on time and in full, or whether you have established a history of making late payments, or worse, not paying at all.

A credit score is determined by the major credit agencies – Experian, Equifax, and Trans Union – and considers five factors:

• Payment history. This shows if you have made payments on credit accounts (mortgage, car loan, credit card debt, etc.) on time. It represents 35% of your credit score.
• Credit utilization. This compares credit card balances to your credit limits. If you are using a high portion of your available credit, a lender may be less inclined to loan you more because they fear your ability to pay it back. Portion of credit score: 30%.
• Length of credit history. How long you have used credit can help your score. Portion: 15%.
• Credit mix. If you have a variety of credit types and make timely payments, your score will benefit. Portion: 10%.
• New credit. Lenders take a look at recently opened credit accounts and frown on multiple applications for credit. Portion: 10%.

Only Buy What You Can Afford

It’s tempting to want to buy a new big screen TV and charge it, but it’s not always wise. The best rule of thumb is only buy what you can pay for quickly – ideally as soon as possible. If there isn’t enough money in your bank account to pay for an item – we’re talking anything from a new dress to a new refrigerator – don’t buy it. You can’t get ahead by falling further behind.

Pay Your Bills on Time

As we have shown already, this category has the biggest impact on your credit score. You build a positive credit history by paying the entire amount due at the end of every month or at least making the minimum payment. The key part is paying on time. Late payments, liens, foreclosures and bankruptcies are anchors on your score, dragging it down for 7-10 years.

Ask for a Higher Credit Limit

This is a relatively easy and effective way to improve your score. If you pay on time over a 6-12 month period, call and ask card companies to raise the limit on your credit cards. That helps with the credit utilization factor – the percentage of available credit you use each month – that makes up 30% of your score. Keep in mind that raising your credit limit does not mean you have more room for spending.

Check Your Credit Reports and Dispute Errors

The credit reporting agencies deal with more than 200 million reports and one in five of them has an error. The errors range from incorrect reporting status to fraudulent charges that result from identity theft. If you’re one of the 40 million with an error, it could cost you from 10 to as many as 100 points.

You can check your credit report once annually from each of the three reporting agencies for free by going to the website annualcreditreport.com. If you see an error, gather any supporting information and dispute the error with the reporting agencies and the companies that provided the incorrect information. This can be done by mail or online.

Other Strategies for Raising Your Credit Score

Raising your credit score is a matter of reliability and responsibility. Here are some more ways to increase your credit score:

Become an Authorized User

Typically, a family member or close friend might add you to their account. Make sure the account has been open for a few years without late payments. Once you are on the account, its history will become part of your credit report. That could boost your credit score as much as 30 points.

Build Your Credit History

If you lack a credit history, it’s hard to make the case that you are a good risk. If you don’t have a credit card, get one. You can also apply for a secured lump-sum loan, sometimes called a credit-builder loan, and repay it on schedule. Demonstrating that you can manage borrowed money is important to lenders.

Keep Accounts Open

It’s better to keep a credit card unused in a safe than close the account, even if you don’t plan to use it. Closing accounts can actually hurt your credit score in the short run.

Understanding the Mortgage Approval Process

Mortgage lenders use checklists to determine if you qualify for a loan. If you have defaulted on a mortgage in the last seven years, that can scuttle your application. Even being more than 30 days late on a loan payment in the past year can be disqualifying.

Knowing in advance what’s important to the lender and some of the rules that apply for a successful loan application can save you a lot of grief.

Debt-to-Income Ratio

To determine the debt-to-income ratio (DTI), divide your debt by your gross monthly income (income before taxes).

Debt is the sum you have to pay each month on borrowed money – cars, mortgages, minimum credit card payments, personal loans, etc.

Income is all the money coming in from salaries, rental property, investments, child support and any other regular sources.

Lenders look at two forms of debt-to-income ratios. One, called the housing ratio, also called the front-end ratio, is the percentage of your income that goes to housing expenses. Those expenses include mortgage payments, taxes, home insurance, association dues, etc. That ratio typically shouldn’t exceed 28% but can be as high as 31%.

The other, called the back-end ratio, is the overall debt-to-income ratio, which compares all debt payments to all income. Lenders consider under 36% ideal, but sometimes will allow ratios as high as 45%.

Those limits apply to conventional mortgage loans. The Federal Housing Administration (FHA) offers mortgages with somewhat laxer requirements.

What’s Next?

What if you think you’ve done everything right and your mortgage loan application is still rejected?

You are entitled to an explanation from the mortgage lender under the federal Equal Credit Opportunity Act. The law prohibits lenders from denying you credit if you qualify.

If a lender turns down your loan application, it must give you a letter explaining why you were rejected. You should know your credit history and your credit score before applying for the loan. If the lender’s explanation doesn’t match that information, you have the basis for a complaint.

You can receive more personalized information about improving your credit score during a free credit counseling session with a nonprofit agency. This session will assess your financial situation, and the counselor will give advice on optimal ways to boost your score and solidify your financial health.