When it comes to buying a home, your credit score is one of the biggest deciding factors. Credit scores begin at 300, but 580 or higher is typically required for an FHA loan. These are mortgages insured by the Federal Housing Administration. They’re designed for people who don’t qualify for a conventional mortgage, which comes with a minimum closer to 620.
If your credit score is below 580, you can still qualify for an FHA loan but will likely need to put down at least 10% of the home’s price. Raising your credit score by even a few points will help you not only get approved for a mortgage, but pay less to borrow it.
Here are your first moves to buying a house no matter where you’re starting from.
Check your credit report
Your credit report is a summary of your personal credit history. It includes bill payments, credit cards, loan payments, and any bankruptcies. This is the document that a lender will pull to figure out how likely you are to pay back your mortgage.
You can request a free copy of your credit report once a year from the three main bureaus: Experian, Equifax, and TransUnion. If you spot any mistakes, you can dispute them with the bureaus directly. Learn more about how to order your credit report.
Calculate your debt-to-income ratio
Your debt-to-income ratio (DTI) is another important number that lenders will consider on your loan application. It comes in the form of a percentage, and the lower it is, the more likely you are to get approved.
To get a sense of your DTI, add up your big monthly payments, like rent, car payment, bills, and credit card payments. Then, divide that total by your gross monthly income before taxes. The result should become a percentage. That’s how much of your income goes towards paying off debt.
Build up more credit
If you’re recently out of college, or you never had any credit to begin with, it’s very likely that your low credit scores aren’t a good indicator for your ability to pay a mortgage. Usually, fixing “bad” credit means paying off credit cards and clearing up old past due items. But if you have a lack of credit, sometimes you may need to borrow more money to build up a good credit score.
It’s important to only borrow money that you can pay back. For many, secured credit cards offer the ability to open new credit accounts with little to know credit history, but they sometimes require a small down payment to show the creditors you’ll pay the card down when needed.
If you have no credit history, it can take a while for new credit to actually reflect on your scores. Landis offers both a 12-month and 24-month program that will give you more than enough time to build up your credit score and apply for your home loan.
Explore all your options
Once you have a better idea of your financial standing, it’s easier to set an achievable homeownership goal. You may want to apply for an FHA loan, or look into a down payment assistance program to help boost your buying power. There are also affordable loan options designed specifically for veterans and rural homebuyers.
Consider a homeownership program like Landis, where you can improve your finances while renting the home you’ll own. Landis buys your dream home for you in cash, then provides free coaching to build your credit score and down payment savings until you’re mortgage-ready. Get prequalified in minutes to see if it’s right for you.