First Time Home Buying Guide: Dealing With Low Credit Scores

By : Home Loans For All

first time home buying

Buying your first home is for sure an exciting experience, but also a very important one to be cautious about, as some mistakes are easily made and not so easily reversible afterwards. However, dealing with credit scores, low-credit scores, in particular, shouldn’t be something you worry about too much. Below, in this guide, you will see that things aren’t as bad as you thought, and getting approved for a loan isn’t such an impossible thing to achieve.

First-time home buyers have many things to consider like their family, the amount of money saved for the down payment or a student loan; whatever the case might be, it’s weighing heavy on their backs and we understand it, but the truth is that you don’t need such a high credit score to get your loan approved, and your rates might still be good even if you think they aren’t.

The statistics of the National Association of REALTORS® state that despite the favorable mortgage conditions, only 1 in 3 home buyers are first-time home buyers, and you can be that 1, as this guide will help you understand the things you are worried about, unnecessarily, and move beyond them.


Understanding Credit Score


First things first. To make the decision whether you want to get a loan to buy your first house, you need to have knowledge about credit scores and whether you have a good one to make you eligible for a loan in the first place.

Lenders see the credit score as a defense against people who are likely to stop paying their debts – or going delinquent for more than 90 days. Basically, it is a number that represents a prediction if that person will or will not make regular payments within a period of 90 days after their payment is due. In case you fail to make a payment in the given 90 days, the bank that lent you money has a legal right to reclaim your home – process known as foreclosure. Foreclosures cost a lot, which is why banks avoid them as much as possible and calculate your credit score, to begin with.


How Are Credit Scores Calculated?


Credit scores have reference values of 300-850, where 850 makes you the most favorable loan applicant to lenders. A score of at least 500 is required for you to be approved for a loan. Banks calculate your score based on the payment history of your current and past creditors, as well as your indebtedness. The types of credits accounts you keep and the length of time you’ve successfully managed your credit obligations are two variables also taken into account when calculating your ability to repay a loan.

The reason why first-time home buyers are hesitant to apply for a loan is that their credit score is lower to start with. This is due to the absence of previous payment history. Ironically, you need a mortgage history in order to get a mortgage and for first timers that can be a little tricky. This is because as a beginner you don’t have any experience in negotiating, properly attending a closing and you are more likely to make mistakes that previous home owners won’t.

In addition to the factors that lower your credit score, age plays a big role. Namely, applicants below 30 not just that have naturally lower scores, but it is also possible they don’t have a score, before all else. The reason for this is their lack of opened and active credit account in the last six months.

So, in case you don’t have a credit card in your own name and you’re not making any student loan payments just yet, we recommend you get yourself on the credit scoring grid because it’s highly possible you have no score whatsoever.

To personally familiarize yourself with your situation, it is best if you consult with a mortgage loan officer that knows your state and will tell you exactly how to raise your scoring.


Loans For Low-Credit Scorers

Having all this said, it is still possible to apply and be approved for a mortgage, even if your credit score is lower than the standard one. Below you have all the possibilities and types of loans you may still be eligible for, and while reading, have in mind that low credit score isn’t equal to a bad credit score. Take a look at our comprehensive guide to buying a house with bad credit here.

For those with scores on the lower end of the scale, the Fannie Mae HomeReady™ mortgage offers low down-payment loans for first time home buyers. If you have a score of 620 or above, you can apply for a loan via HomeReady™ and be successfully approved. The Federal Housing Administration stands behind the FHA and if you have a score of 580 or higher will finance you with just a 3.5% of down-payment.

If you have served the military, as a veteran you can apply using your VA benefits from the Department of Veterans Affairs which allows for 100% financing and you have no minimum credit score. Lastly, the USDA is another way of getting a loan which is also a zero down payment loan and is available almost throughout the entire country, if you have a minimum score of 620.