First-Time Homebuyer Needs Credit Advice

“Dani” asks:

My score is right around 620 and I’m looking to get my first home. My question is, should I wait until I improve my score to buy and risk rates going up, or buy a home while rates are lower now? Together my husband and I make about $56,000 a year and want to buy between $120,000 and $130,000. But we want a 30 yr fixed rate and don’t have a lot for a down payment. We’re also wondering if that is possible to get one loan with private insurance instead an 80/20 loan with our credit score?

1. You indicate your credit score is around 620. I want to make sure you have checked your three bureau credit scores through MyFICO.com. The middle of those three scores is the one most likely to be used to qualify you for a rate and program. If you are using credit scores from another source, they are not the same scores that mortgage lenders use and will not be as useful. And since scores can vary widely between the three credit agencies, you’ll need all three to make sure you have the correct number. Make sure your husband has checked his too. Typically the lender will use the score of the person with the higher income, which may be you or your husband. (Our system will search mortgage programs using all three scores, and take into account each lender’s criteria for evaluating those scores.)

2. The price range in which you wish to buy sounds reasonable for your income, but the fact that you have little saved and lower scores does worry me. If you get too strapped with the purchase, you’ll have nothing to fall back on when the normal expenses of homeownership crop up. You may want to look for a real bargain (depending on prices in your area), even if it’s not your dream home, to keep your expenses low. Don’t worry so much about where rates are headed as whether you are ready to buy a home or not. If you feel pressured or rushed, you are more likely to make a poor decision.

3. You may well qualify for a low-downpayment loan with Private Mortgage Insurance (PMI) but don’t rule out a piggyback loan (80% first, 10/15 or 20% second). Compare both. The only way to know for sure what your options are is to find out what loans are available to you. In addition to using our mortgage search engine to compare mortgage loans at LenderRateMatch, I would also recommend you talk with a lender who offers FHA loans. These government insured loans are offered by private lenders, and can be more lenient on credit factors as well as offering a low downpayment. They had fallen in popularity in the past few years, but there is a resurgence in them now that other options have dried up.

We wish you the best with your first home purchase!