Keep your credit
If you want to go from bad credit to a house in 12 months cutting up your credit cards is not the first step you need to take. Do not start to cut off your credit cards and closing your credit accounts. Some people think the first step to improving their financial problem is to get rid of their credit cards. If you plan on using your credit, that is not the right approach. I am writing this first, to stop you from making this mistake. If you close your credit card accounts you’re essentially eliminating your history. The volume of history you have is a positive. So please keep your credit. And fix what needs to be fixed.
Take a look at your credit History
The first step you need to take to go from bad credit to a house is to take a look at your credit. In this step, you really don’t need to know what your score is. What you are looking for is a knowledge of all your accounts. Specially those Accounts that are in bad shape. You need to reestablish a relationship with all your creditors.
The best way to do this and it is free is to go to annualcreditreport.com. Everyone is allowed a copy of their credit report from the three credit agencies. You can get one report every year. In this first step, you need to request all three at once. You need all three because sometimes a creditor would report to one bureau or two but not all three. You don’t want to miss any delinquent accounts, that is why you should look at all three initially.
Having bad credit is a problem but Having no credit is also a problem. If you pull your credit and you find no history, you need to open a few credit lines. This blog post is not for you. This is for people who already know they have bad credit. Keep in mind that when it comes to buying a house, having no credit is almost like having bad credit.
Pay off all small amounts in collection
The first time I pull my credit it was in the winter of 2004. I had one account in collection. It was about $60 for a book I borrow from the library and never returned. A small delinquent account like that can be paid off right away. In my case, it was a library book. In your case, it might be a gas bill or a cell phone bill. Just work on those first. If you have an account in collection, that is just a few hundred dollars give yourself 7 months to pay it off.
Re-Establish good relationship
For the delinquent accounts that will take more than 7 months to pay, re-establish good relationship with the creditors. It’s a good time now to make that phone call you have been avoiding. You need to call all the credit cards and old bill that is a significant amount and you will not be able to pay it off in just a few payments.
You need to negotiate with them a monthly payment that you can afford based on your income. You need to call all of them. Every account needs to be addressed.
Get your down payment
While you are working on fixing your credit if you don’t have any money for a down payment you need to be working on that at the same time. There are many places where you can look for money for a down payment:
- Your 401K
- Start saving
- downpayment assistance programs
- Tax return
In month number #4: Take a look at your credit score
By now you must have:
- made four payments to your creditors.
- re-establish a relationship with all accounts that was delinquent
- Paid out all accounts with small amounts in collection
You need to look at your credit score. The best way to do that is to use credit karma. You will need to create an account. With a credit Karma account, you can check on your score from time to time. By now your credit must have improved. If your score is good at this point, you can try to get a formal pre-qualification letter from a bank. If your score is still not good enough to buy. You need to look at another three months. please do not make any additional debt. Do not miss any payment. Make three more payments than check it again.
In month #7: Take a look at your credit one more time use your account with credit karma.
At this point:
- There has not been any inquiry in your credit accounts for at least 6 months.
- You have been making payments to all your accounts for 6 months straight.
- All your payments have been on time or early to every account.
- You have no account in collections or delinquent
Most people would be in this position at this point. Your credit score should be good enough to buy a house. Contact a Bank and get a formal pre-qualification letter. If not Continue to maintain the same status as above. And wait for month #9
In month # 9: Take a look at your credit for the last time.
At this point, almost everyone would be ready to buy. Contact your Bank, request for a loan to buy a house. Ask for a prequalification letter.
In month #10: Get an agent, look for your house
It takes longer to find a house than most people think. Most real estate agents have many clients they are working with at the same time. Finding the time that works with your schedule and their available time is not very easy.
When you first starting to look at houses, you are not really clear about what you want. Many home buyers the first few times you go out to look at houses, you are not sure of where exactly they want to live. You start to know after you have seen enough houses. You start to compare and contrast. You eventually get a better sense of what your money can really get you. For most people, the house you really want to live in you can not afford.
So 45 days the end of month #9 and the entire month #10 to focus on finding a house. For most people, it takes much longer. For the sake of this post, we will use about 30 to 45 days to find a home.
In month #11 And #12
Give yourself 2 months from the time you make your offer to the day of your closing. Keep your fingers crossed that you agree on a price with the seller and your offer is accepts. There are several other places where the deal might fall through but in this perfect case you close your deal in the last day of month #12. They give you your key at the closing table and you go home dancing.
This is your path to a home in 12 months. A lot of people think their credit is worst than it really is. Just a few months of responsible interactions with your creditors can make a big difference. This process I just explained is not perfect. It might not happen for you like I lay it out. Some of you might be deeper in debt than I am considering here. In any case, I hope this helps someone. If you have any other advice that can help, please leave a comment.