Don’t Let Your Credit Score Stop You From Buying a Home

Don’t Let Your Credit Score Stop You from Buying a Home

Anything you think is in your way can be removed if you really want to become a homeowner.  In fact, you’ll find out that some commonly perceived roadblocks are only myths, and don’t need to delay your dreams anymore. If you are hesitant about moving forward, my 5-week series is just for you — The 5 Most Common Myths BUSTED About the Best Time to Buy Your First Home.

This week you’ll learn why you don’t have to give up on your credit score and forget about becoming a homeowner. You can still make it happen as long as you have a plan in place.

Myth:  I need a high credit score in order to buy a home.

Truth:  There are benefits to having a high credit score when it comes to buying a home, but there are great loan programs and options for people who have less than perfect credit. Plus, you can always work toward improving your score.

If you’re even thinking about buying a home in the coming year, now is the time to start giving your credit score the attention it deserves.

It can be considered your “one ticket” to homeownership and getting a “good” mortgage, but you shouldn’t think of it as a roadblock if your score is lower than you’d like.

You can help bust this myth yourself if you start to understand:

• how your credit score is compiled and viewed,
• how programs and loans are out there to make homeownership possible for those of you with lower scores,
• how to improve (and not hurt!) your score starting today.

Credit Score 101

We use your FICO credit score to determine how “risky” you are based on your past financial behavior. We want to make sure you can pay back your loan in full and on time.

Your score is based on information from your credit report, which is kind of like a “report card” on your financial behavior when dealing with credit. It can range from a high of 850 to a low of 300.

Your past payment history and total debt (how much you owe) weigh heavier in its calculation.  Your score also takes into consideration how long you’ve had credit, any new credit, and the types of credit.

Remember, a credit score has nothing to do with your income or investments. It’s based on how you’ve handled your credit card payments and other loan payments, like your car or student loan. 

It also takes into account if you’ve declared bankruptcy, have a tax lien, or you’re being sought by a collection agency. 

Credit Scores Ranges

Let’s look at credit score ranges and what impact they have on your loan options today.

720-850. Excellent

680-719. Good

640-679. Fair

350-639. Poor

<349. No Credit

It’s Not Over Until It’s Over

For those of you with a lower score than you’d like, don’t give up!

We can always help you to understand why your credit score is where it is, provide ways you make be able to improve your score, and take a more in-depth look into your entire financial background. 

We may even be able to help you “rescore” your credit and help you with what exactly to do (and not do) to increase your score quickly.  Sometimes it can be as simple as paying a small debt off. 

Even though your credit score is weighed heavily when applying for a mortgage, it is only one piece of the qualification process.

Other factors that we look at include your savings, total assets, current income, and current debts.

Here are some options that could help round out your own credit-worthiness:

• Prove a year of on-time rent payments to show you’ve been a responsible renter and can handle a mortgage payment at a similar amount.
• Explain it wasn’t irresponsible past actions but rather specific situations that caused your score to dip — such as losing a job in the recession or pandemic, large medical bills, or student loans.
• Have a low debt-to-income ratio.
• Make a bigger down payment, usually 10% or more.
• Have at least 3-6 months of cash reserves in the bank.
• Get a co-signer who has a good or excellent credit score so that the bank knows it can get paid.
• Show you have other assets, such as stocks, bonds, or retirement.

Keep in mind, that even if you get a loan with a higher rate than you would like initially, you can always refinance when your scores improve and it is beneficial to do so. We will always weigh the cost of refinancing with the benefit of a new rate over the length of the loan.

Raise Your Score Quickly

Even simple actions can help improve (or damage) your score. It’s a step-by-step approach but start working on it today.

If buying a home is a goal of yours, then make a commitment to your credit score and focus on ways you can raise it and avoid ways to lower it.

Here are some strategies to keep in mind:

•Make payments on time … all the time. No matter if it’s a few dollars or thousands, a late payment will hurt your score. This makes up 35% of your FICO score.

•Ask for a higher credit limit on your cards but maintain a low balance.  The credit bureaus want to see that you have available credit you aren’t using. Keep your debt-to-credit ratio at 30% or better. This ratio makes up 30% of your entire credit score.

•Never make major purchases during the time of your loan process. You have total control over this! It looks like you are racking up new debt if you start making such purchases.

•Think twice before canceling a long-standing credit card. A credit card that you’ve had a long time shows you’ve built a positive account record over the years.

• Negotiate with creditors to make a “good-will adjustment.” If you’ve been a good customer in the past with a credit card or loan payment and then had one or two late payments because of unemployment or other circumstances, such as the COVID pandemic, see if they will make this adjustment.

•Look out for errors or anything suspicious on your credit report. If you see anything that’s not right or questionable, contact the credit bureau to correct this information. It’s important to monitor your report regularly especially if you plan to buy a home in the coming year. Remember that small discrepancies can lower your score!

•Pay off “trivial fines” such as parking tickets and even library fines.  You don’t want these to get turned over to a collections agency. Don’t let these small fees add up and hurt you.

Let me know if you have any questions about your credit score. Next week, our series will bust the myth that waiting to buy is better. Look out for Renting vs Buying – Your Break Even Point Is Sooner Than You Think.