Get ready to buy: Tips on buying a home with less-than-perfect credit

To purchase a home, most people need to take out a mortgage or home loan. To be approved for a home loan, you need to have a good credit history.

But what if your credit is less than perfect? Or what if you don't have enough credit in the eyes of your lender to obtain a home loan? Here's what the experts have to say:

IF YOU HAVE POOR CREDIT ...

"The first thing to do is to look at your credit line utilization," says Dave Weston, branch manager of Aspire Lending in Cape Girardeau. "For example, if you have a $5,000 limit on a credit card and you owe $4,000 on that card, then the card is 80 percent utilized. Ideally, you want to keep your credit cards at 30 percent utilized or less, so if your owed balance is way above that, you need to pay those down."

Cheryl Ziegler, vice president/mortgage loan originator at The Bank of Missouri, agrees.

Coins and model house

"Keep the balance that you owe on your credit cards low ... and pay off the debt you have instead of incurring more debt," she says.

She also recommends checking out your credit score once a year.

"You can pull up your own credit score for free once a year and it won't hurt your score," she says. "You can go online to (a website such as) www.freecreditreport.com."

Kathi Fish, a Realtor at Realty Executives of Cape County, advises potential homebuyers to visit with a lender early on in the homebuying process.

"Visit with a lender early on so they can help you along the road to recovering your credit," Fish says. "A good lender will walk a client through each step to improving their credit."

Payment history is a big part of your credit score.

"Payment history is 35 percent of your credit score and has the greatest effect on improving your score," says Shelly Kaiser, assistant vice president/mortgage loan officer at First Midwest Bank in Jackson. "Pay your bills on time, and if you have missed payments, get current and stay current. Also, paying off a collection account won't remove it from your report, as it stay on there for seven years."

Weston says the past 12 months of your credit score are what's most important.

"Credit scores are most heavily weighted on what's occurred over the last 12 months," he explains. "If you have a delinquency or are late on a payment, wait one or two months past that 12-month time period before applying for a home loan."

Remember that poor credit history can remain on your credit report for a long time.

"A delinquency or a judgment filed against you can stay on your credit report for seven years," Ziegler says. "An unpaid tax lien or bankruptcy can stay on it for 10 years."

Kaiser points out that improving your credit score takes time.

"Improving your credit score is more about fixing errors in your credit history and then maintaining a consistent good credit history," she says. "It takes patience and discipline."

Fish agrees.

"If your credit is bad, then remember this: You didn't get there overnight," Fish says. "It takes time to recover your credit. One of the best programs I have seen to help with debt/finance management is the Dave Ramsey Financial Peace Program; sacrifice today so you can live freely tomorrow."

IF YOU DON'T HAVE ENOUGH ESTABLISHED CREDIT ...

Obtaining a home loan when you have very little or no established credit can be a slippery slope as well.

"You can apply for a small loan or for a credit card and make your payments on time to build up your credit," says Ziegler.

Fish thinks along the same lines.

"I think the very best thing you can do if you have no credit is to get one or two credit cards in your name and charge your monthly purchases," she says. "Then, pay them off at the end of each month. Just be cautious not to overcharge."

Sometimes it takes creativity to establish a strong credit history.

"You either need to establish a total of three credit trade lines with a payment history of 12 months, like credit cards, auto loans, etc., or you need to think of four 'nontraditional' credit trade lines with a payment history of 12 months, like rent, cellphone, utility or auto insurance payments," Kaiser says.

Weston recommends paying bills in a verifiable way to help establish a good credit history.

"Pay things like rent with a check," he says. "That way you have a tangible history. Paying in cash won't count (toward your credit history)."