First-time home buyers guide: buying with low credit scores
Buying your first home: dealing with credit scores
When you’re a first-time home buyer, you face challenges that experienced home buyers don’t face.
For example, you may have less money saved for a down payment; or a collection of student loans which is weighing on 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 home buyers account for 1-in-3 homes sold nationwide; and, despite the depth of today's mortgage rates and a wide array of low- and no-downpayment mortgages, that figure doesn’t appear to be rising.
Buyers fear they can’t get approved. Many are worried about credit scores.
The reality, though, is that you don’t need a high credit score to get home loan-approved — and your rates can still be great.
This post discusses credit scores; and, is the next in a series meant to help first-time home buyers buy their first home and get approved for their first mortgage.Verify your home buying eligibility (Sep 24th, 2020)
What is a credit score?
A credit score is a number used to predict the likelihood of a person going delinquent on a loan.
What does it mean to “go delinquent”? With respect to mortgages, it means going 90 days without making payment to your lender.
And, why 90 days?
Because, after 90 days of non-payment, your lender has a legal right to reclaim your home, through a process known as foreclosure, which can be extremely costly to 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 go delinquent.
Credit scores range from 300-850, with 850 being the highest.
Your scores are based on your payment history to your current creditors and amount of indebtedness; as well as the types of credit accounts you keep and the length of time you’ve successfully managed your credit obligations.
Because a credit score of 500 is required to get mortgage-approved, only 5% of U.S. consumers would be mortgage-ineligible based on their credit score alone.
Everyone else meets at least the minimum mortgage credit score standard. However, for first-time home buyers, credit scores are likely to lean lower.
Younger consumers show lower credit scores
As a first-time home buyer, you generally have less life experience than a person who has previously owned homes.
You’ve don’t have the experience of successfully negotiating the purchase of your own home; nor, the experience of attending your own closing and receiving your new set of house keys.
You also lack the experience of paying on a mortgage and, paradoxically, not having a mortgage can make it difficult to get approved for one.
It’s the old adage of “it takes credit to get credit”.
The best predictor of whether you’ll make mortgage payments in the next 90 days is the recent mortgage payment history as reported on your credit report.
Except, as a first-time home buyer, you have no recent mortgage payment history.
Therefore, first-time home buyers tend to have lower credit scores as compared to the general population — especially first-time home buyers who are not yet 30 years of age.
Some of these buyer may not even have credit scores at all!
This is because, to generate a credit score, you must have at least one credit account which has been open for at least six months; and, one account which has reported account activity within the last six months.
If you’ve never had a credit card in your own name, and you’re not making payments on your student loans just yet, it’s possible that your credit score may not exist.
As a first-time home buyer, then, it’s important to get yourself on the credit scoring grid.
There are a number of ways to this, but before taking that step, have a talk with your mortgage loan officer. Applying for the POST could do more harm than good. You’ll want to get professional advice on this one.Verify your home buying eligibility (Sep 24th, 2020)
Mortgages for buyers with lower credit scores
As a first-time home buyer with no history of making payments on a mortgage, it’s likely that your credit scores will fall short of “excellent” — even if you pay your bills on-time each and every month.
However, that’s okay.
There’s a large selection of mortgage loans geared toward first-time home buyers, and which allow for lower credit scores.
Many allow for low-downpayment and 100% financing, as well.
For example, the FHA loan, which is backed by the Federal Housing Administration (FHA), allows for a downpayment of just 3.5% for borrowers whose credit scores are 580 or higher.
The same program accepts borrowers with credit scores between 500-580, although a larger downpayment of ten percent is required.
The Fannie Mae HomeReady™ mortgage is another low-down payment loan available to home buyers with credit scores toward the lower end of the scale. Via HomeReady™, buyers must only show a 620 credit score in order to be approved.
Military borrowers with lower credit scores, meanwhile, 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.
The USDA home loan, which is available in most parts of the country, is another zero-down payment loan. In order to be USDA-approved, borrowers must have a credit score of 620 or better.
Just remember that “low credit” is not the same as “bad credit”.
What are today’s mortgage rates?
First-time home buyers tend to have lower credit scores than the general population, and that’s okay. There are plenty of mortgage programs meant to help first-time buyers move into homeownership.
Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Verify your home buying eligibility (Sep 24th, 2020)
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