Build credit before house hunting

Having no credit or bad credit won't qualify you for a home loan

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Dear To Her Credit,
Can you please help me? I'm trying to buy my first house with no credit. Can you teach me how can I make my dreams come true? I can't wait six months to two years.  -- Holly


Dear Holly,
Buying your first home is a wonderful dream. If you want a home of your own, you should start taking steps immediately to make that dream a reality. I'll be honest, though. It might take a little longer than you hope before you have the keys to the front door.

Before you buy a home, you'll need credit or the ability to get a loan, cash for a down payment and a mortgage broker or other source of financing. You also need to determine where you want to buy your home, and you'll probably need to find a real estate agent to help you find one.

You say you don't have credit. Have you checked your credit history recently? You may find more on your report than you think. You can get a free report annually from each of the big three credit bureaus at Or maybe you mean your credit is trashed and you need to rebuild it. Either way, you need to take similar steps to bring up your credit score.

Unfortunately, you can't build or rebuild your credit in a matter of months. It will take at least a year or more. Apply for some kind of credit today -- perhaps a secured credit card where you put down a deposit as collateral, or even a department store or gas card. To keep from going into debt, do not purchase anything with the card that you do not already have the cash to pay for. In other words, don't spend next month's paycheck today. You should use your new credit card, but purchasing a tankful of gas, a few groceries or other item that you would buy anyway will do.

As soon as you get the bill, pay the entire balance. Not only will this keep you from accumulating debt, but it helps your credit report show a steady repayment cycle and better debt utilization ratio. The less you owe compared to your available credit, the better.

Another way you can build credit is to buy a vehicle or other purchase on time. Unless you need a car anyway, however, I wouldn't go out and get one now. You'll need all your cash and disposable income to qualify to buy a home.

You can also ask your landlord, cell phone company and so on to report your history of on-time payments to the credit bureaus. This can help you establish a so-called alternative credit history, which some (but not all) lenders will take into consideration.

To raise cash for your down payment, consider working extra hours or a second job, selling things you don't need and temporarilyi cutting back drastically on expenses. Think of it as a crash diet for your finances. Most of us can tuck away a surprising amount of money in a short amount of time if we're motivated enough.

I like to work with a good mortgage broker when I get a home loan. Sure, you can go directly to lenders or even apply online. There's nothing like an experienced mortgage broker, however, to steer you through the process of finding and getting a loan. As a first-time homebuyer, you may want to see if you qualify for an FHA loan, which lets you buy a house with as little as 3 percent down. If you're a veteran, you may want a VA loan, which has even better terms. Finding and applying for a loan can be complicated, but a good broker can explain the details, help you compare costs and improve your chances of actually getting the loan.

You'll want to get pre-approved for a loan before you even start shopping for a home. The days when you could look at homes and even make an offer without showing that you can actually buy a home, are pretty much gone.

Now you need to decide where to buy a house. Many people look at where they work, and try to buy a house as close to work as possible. This can be short-sighted. Very few people work at the same job forever these days. You probably hope to live in your house for years to come. Unless you have a dream job that you couldn't replace, look at all your options before you commit to where you will live and buy a house.

You can get a lot more house in some parts of the country than in others. In San Francisco, for example, it takes a lot of money to get into a "starter" home. In many places in the Midwest, for example, you can still get a house for well under $100,000. If you want to stay in the general area where you live now, be sure check out the neighborhoods a few miles each direction.

With cash in the bank, pre-approval letter in hand and a good idea where you want to live (and can afford to buy), you're ready to start house shopping with a real estate agent. This is the fun part!

I can't promise how quickly you will actually qualify for and buy a home. It may very well take six months, or even a year or two. Time passes quickly, however, and once you get your very own home, you'll find it was worth every bit of effort you put into it. Congratulations in advance on your new home, and I hope you enjoy it for many years to come!

See related: 5 steps to a mortgage-worthy credit profile

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Updated: 10-21-2018