Your credit score plays a big role in your home ownership goal, especially if you do not have the funds to pay for a home in cash. Realistically speaking, only the top 10% of society can financially achieve this. And if you can’t afford to pay in cash, this is where mortgages come in.
Applying for a mortgage can be very tedious and complicated or a breeze, depending on how prepared you are.
One of the things that you would need to prepare is your credit score. As you start to think about buying a house, it’s important to know where you stand financially. This can help you determine if you’re ready to take the next step on your homeownership goals.
You can check your credit score as part of this process. This will give you an idea of whether or not you’ll be able to meet a lender’s requirements and get an expectation on how much they’ll approve you for and what interest rates would look like.
Furthermore, this can help you decide if now is the right time for you to start looking into mortgages or if you need extra time to save up some money first before starting down that path.
A credit score is a number between 300 to 850 that determines your creditability. Banks and institutions look at your past transactions such as on-time payments of previous credit cards, and loans — if you pay all of these on time and follow the agreed-upon terms — and cross-reference your income to the total amount of debt that you currently have.
Depending on how good all your background information is regarding your finances, they then give you a score wherein 300 can be the lowest and 850 can be the highest. With that being said, according to most banks and institutions, a decent credit score that can qualify you for a mortgage will be at least 620.
If you’re looking for an alternative option to traditional lenders, you may want to consider loans from the USDA, FHA, or VA. These programs have lower credit score requirements of 500-580 depending on which program you choose.
The FHA loan has a maximum loan limit while the VA requires you to buy a home in a rural area. Both programs have more lenient requirements but come with certain downsides. For example, if you’re buying your first home and have a low credit score, VA loans can be difficult to get approved because they require that buyers have enough income to cover their monthly payments and still have enough left over at the end of each month to qualify for an insurance payment on the loan. The USDA program is similar in that it requires that buyers live in certain rural areas.
While these alternative options may sound like they’ll save you money or make it easier for you to qualify for a mortgage with little effort on your part, there are some other downsides as well. You will be required to pay higher interest rates than traditional mortgages because these types of loans tend to require higher down payments and longer loan terms—and because they do not offer zero-down alternatives like conventional mortgages do.
If your credit score is in great shape, that’s great! But if it isn’t, don’t lose hope. There are still ways to fix this.
Improving your credit score can be a formidable task—it’s a long journey that needs effort and dedication. Some simple steps to take to improve your credit score include avoiding missing due dates on all your bills, reducing credit utilization, limiting hard inquiries, and consolidating your debt.
Always review your credit report and make sure there’s nothing wrong with it (although not often), there are times when mistakes on it can lower your score. To keep your credit score updated, you can also regularly report changes such as fully paying a loan or a credit card.
You don’t have to be afraid of going into debt just to realize your real estate goals. The idea of “debt” is crippling for most adults, which is completely understandable, but with balancing your credit score and making sure you are up to date with repayments, debt through the form of credit-based loans and plans with banks and institutions is a pretty credible way to build up your financial autonomy and eventually be able to afford your dream home.