When buying a home, qualifying for a mortgage requires the lender to evaluate several financial variables in a potential borrowers financial profile. Chief among them is Credit which is why it is so important to build a solid credit score in order to be ready to buy a home.
What credit is needed to buy a house normally depends on how you plan to purchase your home. If you have the down payment funds saved for your home purchase, then many lenders offer FHA loans that allow a qualified buyer to purchase a home with a mid-credit score of 580. For down payment assistance programs, there are programs with varying credit score requirements, however, a common threshold for credit score requirements when being qualified to purchase a home using down payment assistance is a mid-credit score of 640.
What Credit Score is Needed for a First-Time Home Buyer
Normally, for credit purposes there is no distinction between first time home buyer and a repeat home buyer. A potential homebuyer looking to buy a home must qualify their credit just as a repeat home buyer would. However, if a home buyer is purchasing a home using a first-time home buyer program that has specific credit requirements, then the buyer of course must follow that programs stated requirements.
Building Your Credit before Buying a Home
Having a solid credit score when purchasing a home is essential to getting approved for a mortgage. Those consumers that have not established a credit history yet or who have poor credit should work on establishing credit or improving their credit by getting one to two credit cards. Some might find it tough to get a traditional credit card, however, in these cases consumers do have an option to obtain a credit card and that option is called a secured credit card.
Unlike traditional credit cards, secured cards require the cardholder to put down a cash deposit that serves as collateral if the bill isn’t paid on time. Typically, the deposit amount is also the cardholder’s credit limit, at least at the beginning. In many cases the minimum credit limit is $300 but can go much higher depending on how much the borrower wants to leave on deposit with the card issuer.
For consumers just starting out and developing their financial foundation, it is recommended to obtain their secured card from a card issuer that reports to all three credit bureaus. There is no benefit to getting a new credit card that only reports to one or two credit bureaus so be sure to check that your card of choice reports to all three credit bureaus.
Currently the rate on secured credit cards is about 22% – 24% which is high, but consumers shouldn’t worry about the rate on the secured card if they plan to use the card as they should in order to build their credit. “Remember that the main purpose of obtaining a secured credit card should be to establish or re-establish a positive credit history,” says Stephen Khan, a Phoenix, Arizona based mortgage loan officer. “Card users can do this by paying the balance in full every month, and when this is done consistently the interest rate won’t impact you”, says Khan.
That gets into how consumers should use this card to receive the most benefit to establish or repair their credit? Credit utilization as a portion of a borrowers total available credit limit is an important factor in shaping one’s credit score. “We recommend that a secured card user charge 30% – 40% of their total available credit limit and pay off the balance in full each month”, says Khan. Do that consistently for twelve straight months and card users will find that the secured credit card does wonders for one’s credit score.
One question we often hear from clients establishing their credit is will the bank ever turn the secured credit card in to an unsecured credit card? The answer varies and depends on a number of factors, but at the end of the day and what matters most is that every financial institution and card issuer has their own set of rules to follow to make this decision. What we have seen is that when a borrower uses their card and makes twelve months of on time payments the cardholder will be issued an unsecured credit card and the borrowers deposit money will be refunded.
After a year of using the secured credit card, go to annualcreditreport.com and obtain a free copy of your credit report to take a snapshot of your credit to see how you’ve done in building or re-building your credit in the past year.
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