First–time home buyers can face more challenges than repeat buyers.
In our credit for home buying tips we tell that first–timers often have a poor credit score. More often, they have no credit history at all, which is known in the industry as “a thin file.”
Fortunately, a thin file might not stop you from buying a home.
Multiple loan programs today can accept buyers with no credit score at all, as long as they can afford the upfront cost and monthly mortgage payments.
If you’re a buyer unable to qualify for a conventional mortgage, doing some research before you buy can help you avoid a number of potential pitfalls.
Why is a credit for home buying score important ?
You should always consider the credit score before you make a home purchase, whether it’s a primary residence or a rental property. A good credit score can help you make purchases with as little as 20% down, as long as there’s a strong financial safety net to help cover unexpected expenses.
Why do buyers have low credit scores?
Some of the causes of low credit scores might surprise you. It’s probably possible your credit score isn’t quite where you think it should be. Here are five potential culprits.
Experience works both ways. If you’ve never taken out a mortgage loan before, you likely won’t have good credit. Experienced homeowners likely have great credit. The less experience you have, the higher the credit score-grabbing lift you’ll need to achieve before getting approved for a mortgage.
If you’re a first-time buyer and you haven’t had much experience with buying a home before, credit score is probably the least important credit score you have.
2. Chunks of Financing
Just because you’re not qualified for a conventional loan doesn’t mean you can’t buy a home with financing. There are numerous programs that prefer first-time buyers with lesser credit or no credit at all.
Traditional lenders know they can make money on these borrowers, so they want to make sure they get the deal. But conventional lenders have many hoops they need to jump through before they will allow you to make a loan. And the payment amounts, qualifications, or down payment can be a deal breaker.
What are alternative lenders doing to accept credit for home buying?
There’s another group of buyers who qualify for financing but can’t actually buy a home. Some of them pay a non–refundable down payment and sometimes a premium premium. But these buyers aren’t typical buyers and don’t have trouble getting financing.
The difference between a “standard” and an “alternative” loan is usually based on the particular loan term, the credit score, and the down payment amount. As long as the numbers work, buyers are okay with using more expensive financing options. These loans tend to be more flexible, as they often end up extending the term of a mortgage.
How much should I prepare for financing?
The more you know about financing, the better. The more you’re prepared, the better you’ll be when qualifying for a mortgage.
While credit history always matters, there are other compelling reasons first-timers may want a loan.
A good credit score isn’t the only factor in whether a potential buyer will be approved for a house purchase. Instead, it’s the buyer’s employment and education record that will look most favorably upon their future purchase.
A record with prestigious schools and a job offer can improve the chances of a second or even subsequent chance to buy a home. Consider graduate school, traveling the world, or an internship with some of America’s best journalism, design, or technology firms. Being a high achiever in some area is particularly attractive.
Getting into a good school is another plus.
Qualifying for a job is just as enticing. Hundreds of thousands of people take this route each year.
There are several ways to raise your credit score, which helps increase your ability to qualify for loans.
Aim to build one or two good credit score points in each of your first five years of homeownership. This improves your chances of being approved for a mortgage when you have more favorable credit for qualified buyers with lower credit scores.
Pay off all your debts within 20 months of closing. Believe it or not, debt closes before actual credit.
Other great ways to improve your credit score include paying off debt, steadily building your credit, and having 40-60% of your income in savings for the future.
Your excellent credit score is only one of the reasons you can purchase a home. In other words, there are a myriad of other benefits related to your credit.
Here are some of the top reasons:
Increased approval rate- up to 20% higher.
Lower homeowner association (HOA) dues and fees for you and your spouse.
Lower HOA insurance.
Lower property taxes.
A $32 billion nationwide savings account.