The decision to purchase a house is an important one. It’s a major opportunity to grow an investment, as well as find a place to call your own. However, a significant percentage of adults today—many of whom are Millennials reaching traditional home buying age—are putting off home buying or are forgoing the pursuit altogether. The truth of the matter is that purchasing a home is far less expensive in the long run than long term rental, and offers many more perks and opportunities over time.
One of the reasons people commonly cite for putting off the home hunt is tied to their debt load and credit. Thanks to student loans, credit card debt, and the occasional missed payment, a lot of people don’t feel they have what they need in line to secure a mortgage. Many Americans believe that homeownership is out of reach. But it doesn’t have to be. This is how you can invest in your future, and put yourself on the path to your first starter home, even if you have the bad credit blues.
Evaluate Your Situation
Is your credit score low? How low? What can you do to fix it? These are the most important questions to ask before you start considering buying a home. Credit is still one of the most critical factors when it comes to securing a mortgage loan, even more so now in the aftermath of the lousy mortgages and burst bubble of the Great Recession. A lot of people don’t look into their credit because they either assume it’s fine, or that it’s terrible and that there’s nothing they can do about it. Both approaches are off the mark.
For one, your credit might not be as great as you believe it to be, even if you don’t have a past of late payments, defaults, or collections. There could still be something on your record you’re completely unaware of that’s hurting your score. There might even be a mistake, too—which are surprisingly common. You should check because the last thing you want is to apply for that home loan after you’ve started making plans only to discover hangups at the worst possible moment.
Even if you’re pretty certain your credit is bad, you need to get your eyes on your credit report. It’s the only way to truly know where you stand and what actions you have to take to improve it, and you’re going to need a solid score if you ever want to be a homeowner. Ignoring it won’t help you, and it’s likely only making things worse.
Make sure you have a grasp on your situation. It’s the only way to know how best to proceed. And don’t worry, contrary to popular belief, using a free service like Credit.com to check won’t hurt your score.
Rebuild Your Credit
Now that you know where you stand, it’s time to take action. If your score is looking rough, don’t panic. You’re not alone and you can work through this. The next step is to identify what’s holding you back. You can get a full credit report sent to you, and sift through it all to find out all the details. You could also hire a credit repair service, pay a small fee, and let them do all the hard work for you—but be careful that you’re using one that is operating within the established legal boundaries. They’ll not only identify the issues, but they’ll tell you exactly how to fix it. Negative marks on your credit report are not permanent and need to be removed after a period of time. You have a legal right to refute anything that isn’t accurate on your reports, and can do so by simply sending a letter to each credit bureau (and being persistent about getting a reply).
Either way, you’ll have to make an action plan. Pick out the priorities, address what you can right away, and form a strategy for the items that will take more time. Tens of thousands of dollars in student loans obviously won’t be solved overnight, but you might have an outdated negative mark or two that you can clear up with a few payments. Also, not only will paying off delinquent balances improve your credit, but often simply making new payment arrangements will. So while large chunks of debt might take some time to whittle down, just the act of making any type of progress could be enough to improve your credit score.
Once you stem the bleeding and begin to turn things around, it’s important to stay the course and to stay on track. Pay what you can when you can, but make sure you do it regularly. You don’t have to put yourself in poverty with huge payments, but you do have to make absolutely sure that those payments are consistent that you’re never late. Late or delinquent payments are the worst for your credit score, so avoid doing so at all costs. Pulling yourself up into good credit is entirely doable, but it takes time and good, steady habits. Credit agencies look for patterns. Make sure the ones they find with you are positive ones.
Considering Rent to Own Properties
One of the reasons rent to own properties surged in popularity as of late is because they make the housing market more approachable for first time buyers. Finding the right rent to own home and working your way into ownership is much easier than buying one outright, particularly if your credit score is low. A rent to own property allows you to start saving and making payments on the home you already live in, and to smoothly transition into ownership when you’re ready. The best part is that you can be doing this while you’re improving your credit score at the same time ensuring that when you take the leap that you’ll be ready to get the best possible rates on home loans.
Making the Most out of the Resources Available
When it comes time to purchase a home, make sure you do your research to find the best and most beneficial resources for your specific situation. Depending on your circumstances—including where you live and your income situation—you may be eligible for more flexible loans and helpful programs. Everything from FHA Direct Loans, to VA Loans, to specific city or state programs are just waiting for someone like you to take advantage of them. Meet with a financial planner or real estate agent to find the best path forward.
Stay Within Your Means
Just because you finally have the ability to purchase a home, doesn’t mean you should, even if it’s your dream house. It may seem overly obvious, but you should make sure you’ll actually be financially comfortable there. Most people are willing to make considerable sacrifices for a home they love which is how such a large part of the country ended up underwater in mortgages and foreclosures. Your total mortgage/fees/payments ideally shouldn’t be more than 30% of your total income. Stay within your means to keep your credit score high and your options open. That way, when and if it becomes time to move into a new home, you can be sure it will be an even better one.
About the Author:
Jesse Miller is a Los Angeles based technology and lifestyle writer. He is a current regular contributor to JustRentToOwn on topics ranging from market watch, city spotlights, and how-to guides for home improvement.