Many who hope to buy a home come across the harsh reality that their past can come back to haunt them. Namely, late or unpaid bills might end upreflectedin their credit score, thenumber that sums up how reliable you’ve been (or not been) at paying back past debts.
It your creditscore is low(think below 650, with 850 being perfect), youmight have a hard time finding a lender who will give you amortgage. That’s the bad news, but here’s the good: There are things you can do to repair the damage and raise this little number well into home-buying territory.
Check out these three real-life credit score comeback stories to know it’s possible, and get some ideas on how toboost your own score.
1. ‘Thehouse I loved was outsidemy financial reach’
How muchhis scorechanged: 680 to 740
How long it took:1 month
Earlier this year,Jeff Nealhad his heart set on buying a house he’d seen inLancaster, PA. The problem? It was priced above what his local bank would loan him based on his credit score, which was 680.
“After seeing the houses that were available in my price range, it was obvious that I needed to increase my potential loan amount,” he says.
So Neal, an entrepreneur, got resourceful and sold off a website he owned, then used the cash to pay off $9,000 in credit card debt in one fell swoop. Within a month, his credit score shot up to 740—and fortunately for him,the house he had his eye onwas still on the market. So he pounced, and it’s now his.
Todd Huettner, president of Huettner Capital, a residential real estate mortgage lender in Denver, says paying downdebt is a surefireway to boost your credit score. Doing soimprovesyour debt-to-income ratio, a comparison of how much money you owe to how much you make. Better yet, the effects kick in fast.
“The impact of paying off credit carddebthappens as soon as the creditor reports the update to the credit bureaus, usually monthly,” he says. However,“even if you pay off small balances or pay down balances in small chunks to lower the utilization rate on any card, you will also see some improvement.”
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2. ‘My wife raised my credit score’
How much his scorechanged: 530 to 713
How long it took:2 years
Francis John, a content strategist from Sioux Falls, SD, says not paying his student loan bills on time ended up sinking his credit score to (gulp!) 530. That was so low, he couldn’t even get an $8,000 car loan. Realizing his dream to buy a house certainly wouldn’t be possible either, he set out to improvehis scoreby turning to someone he knew could help: his wife.
Fortunately, his spouse had a good credit score—whichcould be used to boost his own. They opened ajoint credit card, then took out a small$1,200 loan in both their names for a laptop.By payingtoward both of these debts regularly, John was able to piggybackon his wife’s good credit standing (not to mention her good habits). Over the course of two years, he raised his score to 713, allowing them to qualifyfor a mortgage on their first home this year.
While getting a joint card or loan with a spouse with good credit can “drag up” a poor score,Freddie Huynh atFreedom Financial Network warns that it’s not without risks. If the holder of the poor credit score makes mistakes, he couldalso dragdown the higher score.
“If a spouse has poor credit, the key is to determine the reason, and work on that,” Huynh says.
One safer alternative? Rather than co-signing a credit card, you can add thelow-scoring spouse as an authorized user instead, which means that this person can use the card but the main cardholder remains theone responsible for payments.
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3. ‘A home we already owned damagedour credit’
How much herscorechanged:Low 400s to low 700s
How long it took:3 years
Think home ownership is always good for credit scores?Jennifer Avery, a consumer insights director from Orlando, FL, wouldargue otherwise.
“My husband and Ihad purchased a condo at the height of the housing bubble, in 2006—two kids in grad school who, like everybody else, thought housing prices were just going up, up,up,” she says. “Two years later, the value of our home plummeted, and we were $100,000 underwater on our mortgage.”
A job moverequired them to sell the house for less than what they owed their lender. While theshort saleallowed the coupleto bail on the home without filing for bankruptcy, it also took their credit scores from over800 down to the low 400s, where they had no hopes of getting a new mortgage.
“It was a terrible blow,” Avery admits. “We felt a little better when we watched ‘The Big Short’ last year and saw that even the smartest people didn’t see it coming.”
Yet while their credit scores had taken a hit, Averywas determined to rebound—and took a bunch ofsmall, consistentsteps to make that happen.
“We built our credit back the same way we earned it to begin with—by paying our bills on time and not buying stuff we couldn’t afford,” she says. “We didn’tgo on vacations. We cooked at home. Edgar and I didn’teven geteach other presents at birthdays, Christmas, and anniversaries. All in all, we lived like we madeprobably 40% less than we do, so we couldsave fast.”
Their frugality has paid off, and within three years, their credit score rose to the low 700s—high enough that they’ve beenapproved for a loan on a new-construction home that should be done by the end of 2017.
“It’s been a longride,” she says. “But we are almost there.”
