Mortgages and credit scores are some of those things our parents worried about when we were younger. That’s why when it’s finally your turn to start submitting applications, you’ll definitely know you’ve arrived.
You are now an adult!
Although many perks come with earning your own income—think of shoes and clothes that you can now buy with your own money—it does come with several strings attached. But we’re glad to let you in on a secret: mortgages and credit scores are nothing to be scared about!
Pondering homeownership at this age is nothing short of amazing. It means that you can look well into your future and make plans that will reap many benefits in due time. Affording a mortgage in your early twenties is definitely doable.
In this article, we hope to answer the following questions:
- What preparations must I make if I want to qualify for a mortgage?
- What is credit, and how can good credit help me with my mortgage?
- What’s the lowest credit score that will still allow me to buy a house through a home loan?
- What steps can I take if I want to increase my credit score?
If you’ve got pen and paper ready, it’s time to read on!
Table of Contents
How to Prepare for My Mortgage Application
According to the Federal Reserve, one out of every two Americans at university has student loan debt. So by the time you graduate, chances are you will already have experience borrowing money through your student loan or some credit cards. After all, it’s something that we’ve been told time and again while we were growing up: it’s essential to start building credit as soon as you can. And this is definitely true, as you’ll soon learn once you start applying for home loans.
Mortgages are just another type of loan, but unlike the simpler loans you did with roommates, mortgages deal with a much larger amount of money. And this time, you need to have a house for collateral. This means that if you want to buy a house through a mortgage, you have to face the possibility of foreclosure if you cannot repay the loan.
As you can probably imagine, it’s not easy to qualify for a mortgage. It takes a while to accumulate the essentials needed to be approved for a loan. That’s why it’s an excellent thing that you are already starting to prepare.
The Three C’s of Credit
In 1960, Sutherland Educational Films Inc released a short film called “The Wise Use of Credit.” In this brief movie, a character named “Mr. Money” shares the three C’s of credit: character, capacity, and capital.
In the film, they use the word character to remind you that you have to be trustworthy to be “given” credit, as credit is something you need to earn. Capacity is defined as the ability “to pay your bills,” while capital refers to your savings. They advise that “scoring high on these three C’s is essential to earn a good credit rating.”
Even more than half a century later, these three C’s are still beneficial to remembering what good habits you must make to build a great credit score by the time you absolutely need it.
Good Habits for Good Credit
Here are some things you can do that will help you earn a satisfactory credit score.
- Pay yourself first. This means putting money away for savings before you allot your budget to necessities and other expenses.
- Pay your bills as soon as you get them so that there is no longer any need to set an alarm, and you can avoid forgetting to pay them altogether.
- Live within your means because you can avoid unnecessary debt when you do, and you ensure that you don’t live paycheck to paycheck. So say it with us: budgeting is adulting; adulting is budgeting.
What Happens if You Have a Good Credit Score
Aside from giving you peace of mind (because mental health is important), a good enough FICO Score can help you out a lot when you apply for a mortgage.
With a satisfactory credit score, you can
- qualify for a higher loan amount in case you need more house,
- get a lower interest rate that gives you lower monthly payments,
- and have more options through different mortgage types.
Minimum Credit Score to Buy a House
If you are wondering what kind of credit score you need to buy a house, it depends on the type of loan. Each loan type has occupational, location, and credit score requirements, and sometimes, mortgage lenders even set their own minimum credit score requirements.
To give you an idea of how bigger your world of options can be if you have a higher credit score, here are some of the most popular loan types and the credit score needed to get approved.
Since you will most likely be a first-time home buyer in your early or late twenties, an FHA loan might be the way to go.
This is a government-backed loan that the Federal Housing Administration insures. FHA loans are indeed quite popular because most people who have a FICO Score of 580 (at least) will qualify. But what makes it more achievable is the deficient 3.5% down payment it asks to secure the loan.
If you have a lower credit score, bearing in mind that you might be fresh out of college, the minimum credit score required is really just 500. It’s true! Although FICO defines this as within the poor range as credit ratings go, you can actually get approved for a mortgage with this minimum FICO Score.
As government-backed mortgage loans go, however, you’ll find that loan amounts are limited by the kind of income you can earn. So if your credit is slightly better than 580 and you’re looking to buy more space, you can try applying for a conventional loan.
Conventional loans are mortgages that the federal government doesn’t insure. As a result, you need to have a minimum credit score of 620 if you want to submit applications to at least a few lenders. However, you will find that some mortgage lenders will not approve a borrower with a credit score lower than 650.
Just in case you are serving in our country’s military, you’ll be glad to know that you can get a mortgage insured by the U.S. Department of Veterans Affairs. With a VA loan, you can get access to the lowest interest rates in the industry and not be required to make a minimum down payment, all with a credit score starting at 640.
Finally, we also have mortgages backed by the U.S. Department of Agriculture targeted towards rural real estate buyers.
Even though FHA loans can accommodate almost every American since 99% of borrowers actually have FICO Scores over 500, you can still think of a USDA loan as a safety net. Applications for USDA loans can definitely run smoother if you have a FICO score of at least 640, but don’t beat yourself up if you don’t make this cut. Lenders are still willing to look at applications to present documentation to explain the factors that impacted your score. In addition, there are actually no minimum credit score requirements for this type of mortgage.
The Lowdown on Credit Scores
We hope that now you understand what we meant when we said that mortgages and credit scores are nothing to be scared about. Though your options might get limited by lower credit scores, it’s still possible to qualify for the mortgage you need regardless of your score.
But if you are still set on reaching the minimum credit score needed to buy the house you want, read these tips and try them out!
How to Improve Your Credit Score
- Check your credit report. In case this is shocking news, errors in your credit report are actually quite common, that the Consumer Financial Protection Bureau has even written an entire page on what to watch out for and how to get these corrected.
- Piggyback on someone else’s credit history. You might be wondering just what this means or how it is possible. Let us explain. You can actually get yourself to become an authorized user on someone else’s credit card. When this happens, some of their credit histories can leak into your own credit history, so if you choose your person carefully and this person has a stellar credit score, you will definitely see your own score increase in just a few weeks. If you’re planning to do this before you apply for a mortgage, you might want to do it at least two months before you submit your application so that when lenders pull up your credit report, it will already reflect in the paperwork. Just don’t forget to pay your friend or relative back when you do use their card!
- Watch your debt-to-income ratio. As we’ve already mentioned, it is crucial to live within your means, especially if you are looking to increase your credit. One of the factors affecting your credit is how much debt you have across the board. Do you have little to no income left every month after you’ve paid your bills? The magic number they say is 30 percent. Make sure that after you’ve paid your rent, your utilities, or your credit card bills, you still have at least 70% of the money left over for your wants and needs.
That’s all for now. We hope we could impart valuable information that will help you when you start shopping around for mortgage loans.
If you have more questions, please feel free to ask!