First Time Homebuyers need to consider their credit scores and credit history before purchasing a new home. Credit scores and credit history are one of the main things that lenders review when determining eligibility for a new mortgage. Below are items to take into consideration and some simple steps that you can utilize to improve your credit prior to starting the home buying process.
CREDIT SCORE REQUIREMENTS
Lenders will utilize the middle of 3 credit scores from the 3 credit bureaus (Transunion, Experian, Equifax). If there are two applicants on the mortgage, the lender will utilize the lowest middle credit score of the 2 borrowers.
Conforming Mortgage (insured by Fannie Mae/Freddie Mac) – if your down payment will be less than 20%, you can utilize the Radian One Underwrite Mortgage Insurance program to obtain mortgage insurance with a credit score as low as 620.
FHA Mortgage – a majority of lenders now require a 640 credit score in order to obtain an FHA loan. However, there are a few lenders that will approve loans with credit scores above 600, and even fewer that will approve FHA loans with credit scores above a 560. FHA requires a 3.5% down payment for credit scores above 580, and 10% down payment for credit scores below 580.
USDA Mortgage – technically USDA does not have a minimum credit score. However, lenders have implemented a minimum credit score of 620 to 640.
VA Mortgage – again VA does not have a minimum credit score, but all lenders have set minimum credit score standards at 620-640
CREDIT HISTORY
Lenders will review your credit report for any derogatory credit. They will pay particular attention to Bankruptcy, Foreclosure, Judgements, late payments on mortgages, late payments on credit cards, repossesions. Generally speaking any late payments after a major derogatory event (bankruptcy or foreclosure) will cause your loan application to be denied. Also, a pattern of late payments on accounts will cause the lender to question whether or not they should approve your loan application. It is best to discuss this with your loan officer as they will be more familiar with individual lenders guidelines on credit history.
WHAT YOU CAN DO
You are able to get a free copy of your credit report from each credit bureau once per year. You may want to consider ordering one report in January, another in April, and the third in August. This will allow you to keep tabs on your credit history year round, all for free. To order a free copy of your credit report you can go to www.annualcreditreport.com. Your free report will not contain your credit score. If you spot any errors on your credit report, you can dispute the errors online with the credit bureau.
STEPS TO IMPROVE CREDIT
If you have little to no credit, then a good start is to open up a credit card or two. Never put more than 30% of the limit on the credit card, and pay it off each month. For instance, if you have a $500 limit credit card, never put more than $150 on the credit card. This will help you generate credit scores in a 2-6 month time period. Also, you have to use the credit card for your credit score to benefit from it.
If you have credit, but need to improve your credit scores quickly, pay any credit card balances down to less than 30% of the limit (or pay them off if you can). This can help increase your credit score in a relatively short time period.
Also, you can choose to Opt Out of prescreened offers of credit , basically the “You’re Pre-Approved for a Credit Card” letters you get in the mail are prescreened offers of credit. You can opt-out of receiving these here: www.optoutprescreen.com. This is rumored to increase your credit score by 0-10 points in 5-10 days.
Lastly, speak with your loan officer. Once he/she has a copy of your credit report they can discuss ways to improve your credit scores in the least amount of time.