Happy Monday, everyone! The snow is finally melted and school is back in session (parents, REJOICE!)
The most popular phrase I hear from buyers when they approach me about what first steps to take to buy their home is: MY CREDIT IS TERRIBLE. I then reply with a simple, “Define terrible.” Terrible is such a subjective word. If you used to have a credit score in the 800’s and now it’s in the 700’s, you could still define that as “terrible.”
Before you throw in the towel just yet and say to yourself that you will never be able to buy a house because your credit is terrible(which with that kind of thinking, of course you won’t because you’ve put yourself in a box), let’s take a look at credit scores and how they relate to obtaining a home loan so you can set goals to raise your score and get out of the rental cycle.
Step 1: Where Does Your Score Need to Be?
With most conventional home loans that will include a down payment of 5% down or more, the minimum credit score required is 620.
If you live in a rural area where USDA programs are prevalent, which means 100% financing with no down payments, a minimum credit score of 640 is needed.
For FHA financing, with a minimum down payment of 3.5% of the value of the home, a credit score of 580 is the minimum. Depending on the lender, however, that number may be a 600 or a 620 like the conventional.
For VA financing, the usual minimum score is 620.
Disclaimer: I am not a lender therefore the best advice is to actually consult with a lender to inquire about minimum credit scores required for their loans. These are just used as preliminary bench marks to hit in your journey to raise your credit score.
Step 2: Ask A Lender How Your Credit Score Will Affect Loan Terms
Depending on your credit score, you may be in good standing to buy a home now. However, it is always good practice to schedule a consultation with a lender to ask how your credit score will affect your loan. The lower the credit score, the higher your interest rate could be.
According to The Lenders Network:
- 579 and lower – If you are approved for a mortgage with this low of a score you will have a credit score as much as 2% higher than the current lowest rate.
- 580-619 – You can expect an interest rate as much as 1% higher than the lowest rates available.
- 620-679 – With a credit score in this range your interest rate will be slightly affected. Rates could be .5% higher than someone with great credit will receive.
- 680-739 – This is the range most homebuyers are at, your rate will not be affected much at all in this range.
- 740 and higher – You will be offered the best rates mortgage companies have to offer.
Knowing where you are with your credit score and where you want to be will be the secondary deciding factor in setting your credit score goals.
Step 3: Check Your Score and Ask for Help
Say that you’re at 615 and you want to get to a 660 credit score to obtain USDA financing and still have that wiggle room just in case. You have your goal set. With all goals, you will need to set a strategy, a road map towards that ultimate goal. But it’s hard to draw a map if you can’t see the landscape. Once you have checked your credit score, you will be able to pin point the factors that are affecting it. If you are having difficulties with diagnosing, request the assistance of a lender. Most lenders can identify the problems and help you design a plan of action.
Step 4: Do It!
It’s surprising how many buyers shut themselves off to home ownership because their subconscious is constantly telling them they can’t because credit scores are too low or they don’t make enough money for a down payment or they don’t have the discipline. I challenge you, for a week to take this mantra with you and every morning before you start your day, say:
I am capable of buying a home. Today, I am committed to raising my credit score. Today, I am committed to paying down my debt. Today, I am committed to putting (insert value) in my savings for my down payment. I will be a home owner in less than a year.
I’m not a guru, but I am a fan of dream it then be it. We all live in the realities we create. Create a positive reality for yourself with this mantra and, if you believe it and act on it, you will see results.
Need a good lender? I know plenty of lenders that can assist you in your home purchase!
Allen Tate Company
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