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Understanding first time home buyer credit-part 2

Understanding first time home buyer credit-part 2

First Time Home Buyer Credit Score

Getting a first time home loan can be a daunting task for a first time home buyer. One of the most important factors that your first home loan lender will consider is your credit history.
If you’re a first time home buyer without a credit history, lenders are reviewing your loan application differently than in past years.
Historically first time home buyers have used FHA (Federal Housing Administration) loans to purchase their first home and FHA has used the benchmark that “no credit is good credit”.

FHA recently changed those guidelines and they now require credit scores because when a lender analyzes your credit history they are trying to determine, based on past performance, if you will repay your first time home loan and if you will repay it on time.
First Time Home Buyers Need Good Credit Scores
If you’re a first time home buyer who has no or limited credit, it doesn’t mean the path to homeownership is blocked, it means you’re going to have to do more preparation before you take that journey.
The new FHA guidelines say that you need at least three lines of credit that show a good payment history for at least one year. Those lines of credit can be either traditional or alternative credit sources. Lenders prefer that you have at least two “trade lines” in the traditional category.
That can include, credit cards, auto loans, student loans etc.
Here are some things you can do to build your credit in the traditional category.
1) Get added to a credit card account of a responsible family member. “Authorized user” is not sufficient for a mortgage application, so you need to be a co-borrower on the account. Make sure you’re added to an older account, that has a small balance and that has been paid on time. If not, you may do more harm than good.
2) Apply at your local bank or credit union for a no fee secured credit card. With a secured credit card, you deposit $200-$500 in the institution and they will issue you a credit card with the savings account as collateral. Use the card regularly, but pay the balance each month. Before you buy your first home is not the time to incur additional debt.
3) Once you have established a good payment history on your secured card, then apply for a regular credit card with that same bank or credit union. You can also apply for a department store card (Macy’s, Best Buy, Amazon etc.)
4) If you’re in school and haven’t done so already, apply for a small student loan. The repayment terms are very reasonable.
5) If you’re renting a home or apartment, get the next lease in your name and make the payments on time from your account.
Alternative credit can be your cell phone, car insurance, utilities that are in your name, or any other payment you make monthly that can be verified by the credit bureaus.

Every first time home buyer’s situation is different and if you think you need a professional evaluation of your credit as it relates to first time home buyer loans. Contact Us
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