Deciding to ditch the apartment, look for a home you can afford and apply for a mortgage is often stressful. But it doesn’t need to be that way. One of the most significant causes of homebuyer worry is wondering if your credit is good enough to qualify for a home loan. Rest assured, even if your credit isn’t great, you may still have options.
There are various programs to help borrowers with lower credit scores. And Movement’s loan officers are well equipped to help you find solutions to nearly every credit issue.
But don’t take our word for it. We tapped into three mortgage professionals to get their take. For this blog, we asked home loan professionals to weigh in on some pretty important questions concerning homebuyer credit. Our pros include:
- Linda Youngblood (NMLS # 1076130), a Senior Loan Officer from Asheville, North Carolina
- Jeffrey Vilk (NMLS # 691636), a Team Lead Loan Officer from Tom’s River, New Jersey
- Mike Garrett (NMLS # 252010), a Branch Leader from Kennesaw, Georgia
Let’s see what they have to say.
QUESTION: WHAT SHOULD I KNOW ABOUT CREDIT SCORES?
Mike: The best time to understand your credit score is before you get serious about buying a home. Most people believe if they know their credit is good enough to purchase, then they don’t need to worry about it. But the score impacts many things, so knowing what it is as early as possible can save you thousands on the loan. For example, your credit score might be 675, and that is certainly good enough to get approved for a mortgage in most cases. But with a bit of work, you might be able to get your score to over 700, which may save you a good bit of money on your mortgage. Make sure to really understand all of your options and how your credit impacts your options. I always recommend clients start reviewing credit 90-180 days before looking to purchase so that if there are mistakes or anything that needs to be cleaned up, there is plenty of time to do it.
QUESTION: HOW DO I GO ABOUT CHANGING BAD CREDIT HABITS?
Linda: There are many credit repair companies out there, but I prefer to send my client to a not-for-profit agency such as Consumer Credit Counseling Services. There are local offices all across the USA. They are often the local housing agency, too. When dealing with credit agencies, look to “unfreeze” your credit with all three bureaus and keep it unfrozen until your lender says you are OK. We also have credit monitoring that goes on during the lending process. Another thing to remember is not to dispute a credit line. An active dispute can give us an inaccurate credit score, and scores often go down when a dispute is removed.
QUESTION: HOW DOES CREDIT RATING AFFECT THE TYPES OF LOANS I CAN APPLY FOR?
Jeff: I have been working with first-time homebuyers for most of my career, which usually means dealing with low down payment and average credit. Technically speaking, a conventional loan requires a minimum credit score of 620. However, when you run the loan through the system for a single borrower, you may need a 680 to have a chance at getting approved. Another factor is newer credit, meaning you can have a higher credit score, even 700, and due to your oldest credit account being just a year old, the system may challenge the approval.
I have seen borrowers who have had no credit open up a credit card, get a score in 60 days, and get approved for an FHA mortgage. FHA is much easier to get approved for with low- to mid-600 credit scores. Plus, the interest rate and mortgage insurance may be more reasonable with an FHA loan and those scores. When a borrower has lower credit scores, you usually have to increase the down payment to get a conventional loan approved. So a down payment of 3% may have to increase to 5% or sometimes 10% or more.
QUESTION: HOW DO I KEEP MY CREDIT UP DURING THE HOME BUYING PROCESS?
Linda: Here are some simple and straightforward tips. First, do not take out new credit. Second, keep making at least minimum monthly payments on all your active accounts. Third, do not let any credit account go into deferment. Fourth, do not close any accounts — wait til after you buy a home. And lastly, feel free to continue to use your cards just as you do now, but be ready to pay them off if needed.
QUESTION: WHAT CAN PROSPECTIVE HOMEBUYERS DO ABOUT FIXING BAD CREDIT?
Mike: As people prepare for a home purchase, they’ll often start working to pay off any collection accounts or charge-offs. They assume this will help make their credit look better to lenders when seeking a home loan approval. However, paying off an old collection can have the opposite impact on the credit because even though the balance is now zero, it brings the collection back to the front. It’s best to let a lender review your credit before paying anything off or closing anything. If something has to be paid to get the new home loan, it might be best to pay it at closing.
QUESTION: DO CREDIT RATINGS AFFECT PRIVATE MORTGAGE INSURANCE?
Linda: Credit scores have a huge impact on private mortgage insurance costs. If your scores are under 700 and your down payment is 3% – 5%, it can cost hundreds of dollars a month for PMI. In this case, we almost always go with an FHA loan and its lower fixed premium when there is a small down payment and the scores are under 700. Rates are better on FHA loans than Conventional right now, as well.
If your credit’s not tip-top, you still have options!
Regardless of your not-so-great credit situation, there are still options. Homeownership can still be a dream for you but credit can get confusing, so Movement put together this quick video.
For further advice on everyday questions you have about getting a home loan, contact a Movement Mortgage loan officer near you.