First Time Home Buyer Credit: Questions and Answers
Buying a home is a costly venture and for the typical first time home buyer, it will be necessary to take up a home loan. As is the case with other types of loans, credit rating is one criteria that lenders will be keen on. The following is a checklist of questions you need to ask before you go out and try to secure financing to buy your first home.
Q: What should your credit rating be for you to qualify for a home loan? (or: What's a good credit score for a first time home buyer?)
A: The housing marketing is improving and lenders are broadening their lending efforts but lending conditions remain tight. Lenders use what is known as a FICO score to evaluate credit worthiness. FICO simply refers to the credit score software developer known as Fair Isaac and Company. The higher your rating, the lower your interest rates.
Every lender has their own strategy and levels of risk they find acceptable for different loan products so it is not only the FICO score that is used to determine your credit worthiness. There are some lenders who will give FHA loans to those with as score of 580 (most are in the low-to-mid 600 range), VA and USDA loans if one has a score of 640 as well as some types of conventional loans. These numbers apply to the first time home buyer as well as other buyers, so don't feel like buying your first house should be more difficult in today's market.
Q: What can I do to improve my credit rating?
A: The rating changes from month to month depending on your income and expenditure. You would do well to minimize spending and clear outstanding debts or pay off as much as possible to improve your credit rating before applying for a home loan. The exception to this rule is medical collections - talk to a mortgage consultant about outstanding debt for the best advice. Do this and keep an eye on your score for a few months and see it rise. The lower interest you will be charged adds up to a tidy sum over the duration of the loan so the effort is well worth it.
Bonus: Make sure you avoid some of these common first time home buyer credit mistakes.
Q: What should I do if it is good enough?
A: Getting mortgage pre-approval should be the first step before looking for a house so that you can look for one knowing the kind and size of home you can afford depending on what you have qualified for. This is especially important for first time home buyers - pre-approval tells you how much home you can afford and it tells the seller that you're a serious buyer.
Q: What should I do once I am pre-approved?
A: You need to get pre-approved where lenders from whom you are seeking to a home loan does some checks such as proof and amount of income, your credit history and employment or business history to see if you qualify. Getting pre-approval and pre-qualification increases your bargaining power when you are making offers as lenders are actively looking for reliable borrowers to lend to.
Q: Should I go to mortgage banks or mortgage brokers?
A: There are two kinds of home loan lenders; mortgage banks (or local lenders) and mortgage brokers. Mortgage brokers don't actually lend money but they seek out loan options for their clients. The drawback with these brokers is that they are not directly engaged and cannot intervene or negotiate if a loan application is turned down and it might take them time to secure a loan for you.
Mortgage banks will actually lend you money. They are sometimes however limited in how much they can offer and it might not be enough to get you the kind of house you want. However, many banks play the dual role of being brokers as well as so they combine the best of both.
Bonus: Is AmeriFirst Home Mortgage a mortgage broker?
Q: Are there any other options?
A: First time home buyers do other options outside of the conventional home loan financing. One is the seller financing option where the home seller takes up the mortgage themselves - a land contract. There are also private lenders who give short term loans based on the value of the home but with high interest rates, especially for those who have qualified to get an adequate amount from mortgage brokers or banks.
Q: Which first time home buyer incentives can I take advantage of?
A: The Government offers several to the first time home buyer. One is FHA loans which has incentives like no income restrictions and lower mortgage insurance. The criterion is also less stringent as regards credit ratings as there is in fact no minimum credit score rating. Also, FHA loans offer up to 97 percent of the value of a home. Mortgage insurance will have to be paid upfront however from and month to month.
There are also state incentives where a first time home buyer can get a mortgage with no deposit. These loans are subsidized and there are no stringent income level or credit score requirements. Interest loans are also lower than those of FHA and conventional loans.There are also Rural Home Loans that require no down payment at all but these are available in rural areas only.
As the real estate market improves and asking prices and home values go up, this is the time for the first time home buyer to make a move before houses become more expensive as demand rises. Now is the time to start talking to lenders as prices keep going up.
Learn more about the home buying process and credit with the free guide "The Road to Mortgage-Ready Credit." The free guide is at the button below, and covers many of these questions in more detail.
(creative commons photo credit)