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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.
Wondering what you need to do if you're planning on buying your first home? It's simple. Have the best credit score possible. With a good credit score, you'll almost always qualify for the best interest rates and terms on your home loan. And the less money you pay in interest, the faster you'll pay off the mortgage.
If you’ve started thinking about buying a house, you’ve probably heard the term “credit score.” This number tells a bank how likely it is that you can pay back your loans, and it’s based on things like the amount of debt you have, loans you’ve had in the past, and your repayment history. The higher your score, the more likely it is that a bank will lend you money. You’ve earned your score by taking good care of your finances, so you want to be careful about anything that might take away from it. And one thing that can subtract points from your score is a credit inquiry. “But wait!” you say. “Wasn’t I supposed to get pre-approved for my mortgage before I start looking at houses? And doesn’t a pre-approval count as a credit inquiry?” Good question, but when it comes to pre-approval, your credit score is safe. Here’s why.
What exactly is bad credit? Let's start with the lower end of generally accepted credit scores* for borrowers. If your credit score sits below the 600 mark, you'll have a difficult time getting a first time home buyer loan. As you inch towards a 620 FICO score, your "borrower risk" begins to fall in the eyes of most lenders; 640 and above and you're getting into the safe zone for most loan options. What does this mean for people with bad credit? It means it's time to work on bringing that FICO credit score up, up, up. Get our Mortgage Ready Credit ebook here.
Financial issues can plague a family for years. When the husband has a gambling problem, the wife often pays for it. Wife with a shopping addiction? The husband's credit will suffer if she can't pay for it. Couples who work together on their portfolio enjoy success together. But they can also suffer together when one fails. This can affect your decision about getting a mortgage loan to buy your dream home. But all is not lost. A home buyer had this question recently, and we decided to explore it a bit.
Have we all been reduced to numbers in modern society? Maybe. Social security numbers, credit card numbers, driver license digits, phone numbers and credit scores. I'm sure there are other ways to identify us, too. But all of those numbers are enough to tell me that we're all a series of digits. It's the same for the first time home buyer. You're a number in a database for your real estate agent. You're a credit score to the banks. You're a phone number.
Here's a story relayed to us by one of our mortgage consultants. A hopeful home buyer calls him up and says, "I want to buy a house so I need a mortgage. My bank told me I need to improve my credit score, and I should pay off my collections on my credit report. I did, but my score didn't go up and they can't help me. What can you do for me?"