How to Fix Bad Credit Before Getting a First Mortgage

Bad credit can be detrimental to your financial and psychological health. A poor credit score not only affects the types of mortgage you will be offered (or from which you are disqualified), it can also prevent you from getting employment and housing. Bad credit tends to follow you into your personal life. Fortunately, a poor credit score and report can be fixed. And with discipline and changes in behavior, you can help yourself without outside sources.

Instructions

1

Get a free copy of your credit report, which you can access at the Annual Credit Report website (see Resources). Also, pay for a copy of your FICO score. This is a three-digit number between 300 and 850. This number will tell you where you stand on the credit spectrum. Excellent scores are above 720; poor scores are below 600.

2

Contact local mortgage lenders to get a general sense of the credit scores required to get pre-approved. Most local banks and credit unions usually require at least a 680 FICO for approval. Finance companies, such as Wells Fargo Financial and HSBC Corp., may offer higher-cost loans for those with lower FICO scores--but usually even these lenders do not finance mortgages to customers who have sub-600 FICO scores.

3

Look for the most damaging spots on your credit report. These will include any account more than 30 days overdue, any public records (medical liens, charged-off accounts) and bankruptcies. Circle all problem areas and prioritize them in order of seriousness. (For example, public records can be cleared and are the most damaging. Handle these first.)

4

Review your bank statements. Look for expenses that can be cut. Miscellaneous expenses, such as purchases of excessive clothing, eating out and entertainment, are all non-essential. Create a budget that frees up your disposable income by eliminating all non-essential spending.

5

Contact the lenders or collection agencies who hold your public records. Ask for payoff statements. If you own large balances on these accounts, negotiate a repayment schedule. Some lenders will ask for a good faith, one-time lump-sum payment to start a repayment plan.

6

Continue making payments on your public records until they are paid in full. Draft letters to the credit bureaus. Public records, even when paid in full, will remain on your credit report. You must plead with the credit bureaus to remove these damaging reports. See Resources for a sample goodwill letter. This is the type of letter you must draft and send to the bureaus.

7

Bring all overdue accounts current. Start with the most overdue account.

8

Open a new line of unsecured credit, if you can. Mortgage companies will look favorably on your successful repair of old, poor credit, but they will also like to see you creating new, well-paid credit.

9

Wait at least three months after you have repaid and repaired your negative credit accounts. The credit bureaus continuously update their records, but they often run on a 30-day delay. Start submitting mortgage applications only after you see an improvement in your credit report.