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Buying your first home: managing credit scores

When you’re a first-time home buyer, you face challenges that experienced buyers don’t face.

For example, you may have less money saved for a down payment; or a collection of student loans that is straining your household budget.

You might also feel more nervous about homeownership, wondering if you can really afford to own a home.

You’re not alone.

According to the National Association of REALTORS®, first-time homebuyers account for 1 in 3 homes sold nationwide; and, despite the depth of today’s mortgage rates and a wide range of low, no-down mortgages, this figure does not appear to be increasing.

Buyers worry that they cannot be approved. Many are worried about credit scores.

The reality, however, is that you don’t need a high credit score to get approved for a home loan – and your rates can still be great.

This article deals with credit scores; and, is the next in a series designed to help first-time homebuyers buy their first home and get their first mortgage approved.

Check your eligibility to buy a home (October 22, 2021)

What is a credit score?

A credit score is a number used to predict the likelihood of a person becoming delinquent on a loan.

What does it mean to “become a delinquent”? For mortgages, that means going 90 days without making a payment to your lender.

And why 90 days?

Because after 90 days of non-payment, your lender has the legal right to get your home back, through a process known as foreclosure, which can be extremely costly for the bank.

Lenders want to avoid foreclosure as much as you do, so they use credit scores as their first line of defense. The higher your credit score, the less likely you are to become delinquent.

Credit scores range from 300 to 850, with 850 being the highest.

Your scores are based on your payment history to your current creditors and the amount of your debt; as well as the types of credit accounts you maintain and the length of time you have successfully managed your credit obligations.

Since a credit score of 500 is required for mortgage approval, only 5% of U.S. consumers would be ineligible for a mortgage based on their credit rating alone.

Everyone meets at least the minimum mortgage credit score standard. However, for first-time home buyers, credit scores are likely to drop.

Younger consumers have lower credit scores

As a first-time home buyer, you typically have less life experience than someone who previously owned a home.

You don’t have the experience of successfully negotiating the purchase of your own home; nor, the experience of witnessing your own closing and receiving your new set of house keys.

You also don’t have the experience of paying a mortgage, and ironically not having a mortgage can make it difficult to approve a mortgage.

It’s the old adage that “you need credit to get credit”.

The best indicator of whether you will be making mortgage payments in the next 90 days is the recent mortgage payment history, as shown on your credit report.

Except as a first-time home buyer, you don’t have a recent mortgage payment history.

As a result, first-time homebuyers tend to have lower credit scores than the general population, especially first-time homebuyers who are not yet 30 years old.

Some of these buyers may not even have a credit score at all!

Indeed, to generate a credit score, you must have at least one credit account open for at least six months; and, an account that has reported account activity in the past six months.

If you’ve never had a credit card in your name and aren’t paying off your student loans yet, your credit score may not exist.

As a first-time home buyer, it is therefore important to register on the credit scoring grid.

There are several ways to do this, but before you take this step, talk to your mortgage loan officer. Make a request for PUBLISH could do more harm than good. You’ll want to get professional advice on this one.

Check your eligibility to buy a home (October 22, 2021)

Mortgages for buyers with lower credit scores

As a first-time home buyer who has never made a mortgage payment, it’s likely that your credit scores won’t be “great,” even if you pay your bills on time each month.

However, it does not matter.

There is a wide selection of mortgages available for first-time home buyers that offer lower credit scores.

Many also allow for a low down payment and 100% financing.

For example, the FHA loan, which is backed by the Federal Housing Administration (FHA), allows a down payment of only 3.5% for borrowers with credit scores of 580 or higher.

The same program accepts borrowers with a credit score between 500 and 580, although a ten percent larger down payment is required.

The Fannie Mae HomeReady ™ Mortgage is another low down payment loan available to homebuyers with lower credit scores. Via HomeReady ™, buyers only need to show a credit score of 620 to be approved.

Military borrowers with lower credit scores, on the other hand, can use their VA benefits from the Department of Veterans Affairs to apply for a VA loan.

VA loans allow for 100% financing and, according to loan guidelines, no minimum credit score exists.

Another no-down loan is the USDA home loan, available in most parts of the country. To be approved by the USDA, borrowers must have a credit score of 620 or better.

Remember that “poor credit” is not the same as “bad credit“.

What are the mortgage rates today?

First-time home buyers tend to have lower credit scores than the general population, and that’s okay. There are many mortgage programs designed to help first-time home buyers.

Get Mortgage Rates Live Today Now. Your Social Security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Check your eligibility to buy a home (October 22, 2021)

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