We know that building a home with enough credit is a strategic process that is often built into years of borrowing decisions. Our global economic system is based on the assumption that people need credit for which they cannot afford in cash (think big-ticket prices). So if you want to buy a home, you can either save enough to get a mortgage and save enough money to buy the house in full. Below is an overview of what credit is, how to build credit if you don’t have a credit history, and some tips on how to qualify for a mortgage.
What is a “good” credit score?
The minimum credit score for a first-time home loan supported by the federal government is 580 and values range from 300 (bad) to 850 (excellent). Many buyers with a score below 650 can qualify for conventional mortgages, but the interest rates on these loans will be higher. The higher the interest rate, the more you pay for the loan, which can cost consumers thousands of dollars in interest. According to credit reporting agency Experian, a credit score above 700 or more is considered good. The higher your credit score, the lower the interest rate you will get on the loan, and the more likely you are to qualify for your mortgage.
In short, good credit is one of the biggest ways to save money on buying a home. So if you want to build up and improve your credit, it is best to start 6 – 12 months before the date of purchase. This may seem like a no-brainer, but building credit cards can be a daunting prospect when you have no credit at all. It is important to start building as soon as possible so that you can save in the long run.
How Can I Build My Credit?
The easiest way to get credit is to add a family member (such as a parent or spouse) as an authorized user. If you haven’t authorized anyone to use the account, start with a low-rate gas card to avoid building up large balances that you can’t repay.
Don’t believe what you hear from shady lenders you don’t have to buy big. To have the greatest impact on your balance, aim for less than 30% of your total balance. For example, if you have a limit of $1,000, you want to keep the card at $300 or less. This is called credit recovery and is one of the best ways to achieve good results.
One of the best ways to build credit while keeping usage low is to put a low-cost recurring subscription (think Netflix) on a credit card and pay it off in full each month. If you have car or student loans, your credit score will also be affected by one-time payments. Make sure to set up auto-pay so that you don’t miss a payment. Those who build up their credit should be safe, especially if they have a long history of accidents.
It sounds daunting to make loans from scratch, but a healthy loan is easy and painless if you are willing to be patient and, most importantly, use your credit responsibly. For more information on how you can afford a home in 2021 fill out our zero obligation form here.