Buying a home is one of the most significant financial decisions you’ll make in your lifetime. Like every first-time home buyer, just looking at the listings was enough to make the adrenaline flow. I didn’t know how much more I needed to do to earn the title of a homeowner. During my home-buying process, more so the mortgage approval, I was to learn how much my credit score meant for my home-owning dream.
Well, this now sounds like ages ago, but it gives me joy to help every other first-time homeowner learn everything there is to homeownership. In this post, let’s break down your credit score’s impact on securing a mortgage and how to navigate the home-buying process with a low credit score.
Demystifying Credit Score for Mortgages
A credit score represents your creditworthiness and ranges from 300 to 850. A higher score indicates the borrower has a higher chance of repaying a loan. This is a numerical representation of your ability to pay back a debt obligation, whether a mortgage, car loan, or other types of credit facilities.
Lenders calculate your credit score based on multiple factors, including your payment history (35%), loans owed (30%), length of credit history (15%), new debt applied (10%), and credit mix (10%).
Most lenders use the FICO Score calculated by Fair Isaac Corporation. The FICO score is based on data from your credit reports.
If you have a higher credit score, you’re in a better position to access an affordable mortgage for your first home. This is one of the things most first-time home buyers need to learn earlier in the day. Luckily, if you plan to start your search for a first home, this insight will save you a lot of heartache.
Minimum Credit Score Requirements for a Mortgage
So, what credit score do you need for an affordable mortgage? While different lenders have different minimum credit score requirements for mortgages, you need at least a 620 FICO Score to qualify for a conventional loan. If you opt for an adjustable-rate mortgage, the minimum score requirement is 640.
Of course, you can still access a mortgage with a lower credit score, but this means the terms could be more favorable. Some lenders may be willing to work with borrowers with lower credit scores; others may require a minimum credit score of 620 or higher. This is why you must explore all options when shopping for the best mortgage lenders.
Improving Your Credit Score Before Applying for a Mortgage
A lower credit score doesn’t mean the end of your first home search. There are several hacks to improve your credit score before applying for a mortgage for more favorable terms. Here are just a few:
- Paying down high credit card balances
- Making all of your payments on time
- Disputing any errors on your credit report
- Avoiding opening multiple lines of new credit all within the same time frame
- Keeping your credit utilization rate low
Give yourself ample time to improve your credit score before applying for a mortgage.
Got a Low Credit Score? Here are Some Alternatives
A bad credit score doesn’t allow you to get a loan. If you get a mortgage, it is a more expensive loan or requires a larger down payment to qualify for a loan. Luckily, you can still secure a mortgage with a low credit score through alternative options.
Some alternative options include an FHA loan with lower credit score requirements, securing a co-signer, or opting for a rent-to-own agreement. Other alternatives for getting a mortgage with bad credit include VA and USDA loans.
5 Tips for First Time Home Buyers with Low Credit Scores
If you’re a first-time home buyer with a low credit score, there are several tips you can follow to make the process easier:
- Work on improving your credit score as much as possible before applying for a mortgage.
- Consider working with a credit counselor or financial advisor to develop a plan for improving your credit and securing a mortgage.
- Shop around and compare different lenders and mortgage options to find the best fit for your needs.
- Try a mortgage broker who might know the best lenders for your circumstances.
- Save up a down payment of at least 10% to improve your chances of a more affordable loan.
When securing a mortgage, compare different lenders and mortgage options. This can help you find the best interest rates, fees, and terms for your needs. Be sure to research other lenders, including both traditional banks and online lenders, to find the best fit for your situation.
Working with a Credit Counselor or Financial Advisor
Consider working with a credit counselor or financial advisor if you need help with a low credit score. These professionals can help you develop a plan for improving your credit, including paying down debt, disputing errors on your credit report, and more. They can also guide you on how to navigate the home-buying process with a low credit score.
Final Thoughts
Securing a mortgage as a first-time home buyer with a low credit score can be challenging, but it’s not impossible. By understanding how your credit score impacts the dream of owning your first home, you can work towards improving the FICO score before even starting the home search. Go on and research different lenders, and work to improve your credit before applying for a mortgage to increase your chances of securing a favorable loan. Remember to take your time, shop around, and seek professional guidance to get the most affordable mortgage deal with a low credit score.
Take advantage of the best first-time home-buying course in town to start your homeownership journey today.