This blog post was written by Ikea H., an Earnest loan coordinator.
I was living in an apartment in my early 30s when I decided to buy my first property. Rather than buy a single-family home, I had a more ambitious goal: I wanted to purchase a multi-unit rental property in Philadelphia.
I was captured by the idea of doing a “house hack” where you live in one of the units as an investment property and rent out the others. I wanted a triplex that would eventually have three tenants. That would also mean three sets of utility meters and triple the amount of complaints.
Many people buy a duplex or triplex, with the idea that the rental income can cover some or all of the mortgage. My plan was to get an FHA loan with a down payment of 3.5%. The requirement for buyers is that you live in the property for at least one year in order to qualify for that kind of loan.
However, my dream started to evaporate when I saw my credit report. (Hint: If you’ve never read your own credit report, it’s a good idea to do it regularly. You can learn more here.)
A few too many credit cards—some of which I had made late payments in the past—meant my credit score was lower than 650, the cutoff for “fair” credit quality. I could still qualify for an FHA loan—but not the amount I had in mind to buy the triplex. My realtor suggested I consider using a credit repair service to get my score back up as quickly as possible.
What is credit repair?
These companies offer services to help resolve negative items on your credit report. Services may have a setup fee and cost around $100 per month ongoing. Everything the credit repair service does is something you can do on your own—the difference is that using a service may save you the time and headache of trying to do it on your own.
While there are reputable companies doing it, there are also many scammers. Before considering a service, it’s important to get a recommendation or do your research first. Beware of any service that makes exaggerated claims like raising your score by 100 points instantly or building a new credit file for you.
Also take a look at the Federal Trade Commission’s guidelines for repairing your own credit and what to look for in a service.
When contacting a service, ask them what you can expect to see on your report, and how many months you should expect to use the service. A good company should pull and correct your credit report across all three reporting agencies.
If you’ve signed up with the service, the company will additional required paperwork such as a copy of your photo ID, proof of your Social Security number, proofs of your current address, and a signed contract.
In my case, after I signed up for the service, I began getting updates from the credit bureaus in the mail. Some of the negative items I had racked up during my early college years had been completely deleted. Over the next several months, my credit score increased to 670, which enabled me to qualify with a higher debt-to-income for the rental property I had my eye on buying.
In the end, I passed on buying the rental property because the inspection came back with a few too many repairs that were needed.
However, I also learned that your credit report can be fixed. Credit mistakes don’t have to be permanent and you don’t necessarily have to wait the typical seven years for something to drop off your report. There are things you can do right now to make your score and your life better.