Getting ready to buy a house is an exciting time for anyone. Searching for your dream home is no easy task, but all of the hard work is worth it once you find the right one.
For most people, the first step in the home search process is determining their budget. Buying a home is a lifelong commitment, and thus a lot of thought should be put into budgeting and making the right purchase. Luckily, there are now hundreds of mortgage lenders and credit lines from which to borrow from, meaning you can purchase a house without necessarily having the funds to pay for it in full. Even if you do, most people choose to finance their homes, as this is more financially safe.
Minimum Credit Score to Buy a House
“I don’t know if my credit score is high enough” or “What is the minimum credit score needed to buy a house?” are among the most common thoughts going through people’s minds when contemplating purchasing a house.
Myth Busted: There is NO minimum credit score needed to buy a house.
Now, this doesn’t mean that you can buy any house with any credit score, but it means that it’s not as difficult to get a mortgage as you might think.
There’s thousands of lenders who provide mortgage services, and each one of them evaluates potential candidates differently. Some lenders focus solely on your credit score, while others put a higher emphasis on your income. A few other big factors are your down payment, past payment history, spending habits, and job stability.
The main things evaluated by mortgage lenders are:
- credit score
- down payment
- spending habits
- job stability
- payment history
- length of credit history
A lot of lenders take your down payment into consideration. The higher your downpayment is relative to the total price of the house, the higher your chances of approval. A higher down payment is also likely to lead to a lower APR.
Deciphering how lenders evaluate candidates may sound like a complicated science, but it’s really not. What it boils down to is: whether or not your profile on paper makes them believe that you’ll be able to make your payments. A person with a perfect credit score but no stable income may be denied while a similar candidate with a low credit score but stable employment and income might be approved.
Pitfalls To Avoid When Shopping for a Mortgage
Now that we’ve broken through that myth – we can talk about what really matters. Most people focus on their credit score and whether or not they will be approved, when what they need to focus on is the lending terms.
The truth is, even if you have a terrible credit score, there probably is a lender out there who will approve you. HOWEVER, they will give you terrible terms – a high interest rate, late payment fees, and a long loan term. There’s dozens of institutions out there that make money by deceiving home buyers and giving them ridiculous loan conditions.
Even if you have a low credit score, don’t let yourself be fooled by the many institutions that offer you “guaranteed approval” or “instant approval”, those are often the ones that use this strategy: taking advantage of people with low credit scores and giving them interest rates that are much higher than the industry average.
Preparing For Mortgage Shopping
Buying a house is likely one of the most long-term commitments you’ll make in your life, so it’s important that you prepare for it correctly. There’s a few things you should research and take into consideration before looking for a mortgage lender, or else you run the risk of having a lender take advantage of your lack of knowledge.
- Review your credit report
This is one of the first things that a creditor will look at, so it’s important that you know what they will see. Take a look at your credit scores. Note that there are several different reporting institutions, including Experian, FICO, TransUnion and VantageScore.
Analyze your spending history, the amount of debt you carry, and your payment schedules. Do you have one negative mark on your credit history which is bringing your score down, but 10 years of on-time payments? Why do you have a certain credit score? You should know these things so that you can negotiate your mortgage.
- Compare yourself to the average
You should know what the average scores and profiles are around you in order to know how you compare to them. The institutions you apply to will be comparing you to others, so you should know how you stack up.
It’s important to know this because it will give you a better idea of what loan terms you should qualify for. If your statistics are above average, then you should be expecting to get competitive loan terms. You wouldn’t pay $5 for an orange when every other place sells them for $1 – the same goes for your mortgage.
- Know the market rates
Another important thing for you to take into consideration is the current average loan rate. If the average APR is 2%, then you should by no means accept a mortgage with a rate over 8%.
Again, you need to be informed in order to make the right decision. Too many people lock themselves into loans with terrible rates just because they weren’t properly informed.
- Make a budget
If you’re getting a mortgage, there’s a lot more to budgeting than the price of the house. Your loan terms will have a huge impact on the total amount of money that you end up paying.
You will first need to decide on your downpayment. Remember that the bigger your down payment is, the less you will have to pay in interest, and the more likely you are to get approved on good terms.
Then you will need to make a monthly budget – how much you can pay per month. We all know people tend to spend more on their home than they were expecting, so set your ideal monthly payment, and then set your MAXIMUM. You need to have a set number that you will not go above, otherwise you may get swayed into purchasing something you can’t afford.
- Set your expectations
Once you’ve done all your homework and you’re well informed on your situation, the context of the market rates for home buying, and you’re sure of your budget – you need to set your expectations. You should write down that loan terms you would like, as well as what things are important to you (eg – late payment fees, early termination fees).
Then you will have parameters by which to guide yourself and ensure that you make a smart decision. It’s easy to get convinced or tempted to buy something you can’t afford, but following these steps will help you make the correct decision.
- Look for a lender before you look for a house
Instead of looking for your house first, shop for a mortgage. If you do your research to find the right lender, it’s very likely that you will be offered better terms than what an agency will offer you. It’s also a good idea to get pre-approval. This means that you get pre-approved for a certain amount of money before applying for the specific price of the house.
Pre-approval will also give you a better idea of what price range of houses you should be looking at. It would be a huge disappointment to find your dream home and then realize you can’t afford it. You’ll also save yourself time by looking only at houses that you can afford.
Remember to take your time looking for your home, and never rush into making a purchase. There may not be a minimum credit score needed to buy a house, but just because you’re approved to buy a house, doesn’t mean you should. Make sure that you have a financial plan set in place to pay off your mortgage, and that you have the financial stability to carry through with that plan.