First Time Home Buyer Loans and Credit Scores
This is an excerpt from "The Essential Guide to Buying Your First Home," a free eBook to help get first time home buyers on the right track to buying that first house. Today we're exploring credit scores and "minimum credit scores" for buying a first home.
Finding the best home loan for you really begins with your credit score. Lenders want to know that you’re not a risky borrower, and they will get back the money they’re lending you. The most common way to measure the riskiness of a borrower is through the FICO score, which is based on factors in your credit history. The higher the score, the more reliable of a borrower you seem. Most mortgage loan programs have minimum credit scores. Many of these minimums sit around the mid-to-upper 600 range. Some programs don’t have a credit score requirement. That’s basically how credit scores affect mortgages.
A lesson on sub-prime mortgages, the mortgage meltdown and credit scores: You hear in the news all the time about sub-prime mortgages and how they led to the mortgage crash of recent years. A sub-prime mortgage is a home loan given to someone with a low credit score (typically below 580), making it a risky transaction. These loans were popular with some mortgage companies (never AmeriFirst Home Mortgage) because of the high risk / high reward concept. A lot of companies made fast cash off these deals. When home values crashed and sub-prime borrowers were unable to make their payments, foreclosures became a huge part of the housing market. This is why mortgage programs today have minimum credit score requirements.
How Do I Improve My FICO Score?
Several factors go into your FICO score. One of the biggest is payment history. This is why it’s so important to make your payments on-time. A record of payments consistently and timely will help keep your score up, and help boost it.
Another factor is how much debt you have versus how much credit you have available. It’s known as “capacity used.” This means if your credit card has a $10,000 limit and you have an $8,000 balance, your credit score will suffer. It’s a good rule of thumb to keep the credit used to about 35% (or less) of the maximum credit limit. Increasing your credit limit can sometimes help boost your score a bit, but the best way is to pay down the balances.
The third factor in your credit score is the length of credit history. The longer you’ve used credit (and used it well) the better your score will be. One piece of advice shared in our office is this: get a credit card (secured is fine, but not a pre-paid card or a debit card) and charge a tank of gas each month. In 12 months you’ll have a good credit history built up.
Learn about the 6 credit mistakes first time home buyers should avoid so you can become a powerful home shopper.
To learn more about the home buying process download the rest of the eBook "The Essential Guide to Buying Your First Home" at the button below.