Help First-Time Buyers Improve Credit Scores

Key Highlights

• Having a solid credit score tells lenders that a first-time buyer is good credit risk
• Having solid credit score helps first-time buyer get lower interest rate that could save thousands over life of home loan

Why Good Credit Score Important in Home Buying

Credit scores can be leveraged into great deals, according to NerdWallet.  Deals such as interest rates on home loans, credit cards, auto loans, insurance premiums, apartments, etc.

For example, first-time buyers with a FICO score in the range of 620 would pay $65,000 more on a home mortgage of $200,000 than another first-time buyer with a FICO score over 76.

Help your first-time buyers build, defend and leverage their good credit with the following tips and, by the way, the National Association of REALTORS indicates that 90% of all homebuyers apply for some kind of home loan so these tips help most all homebuyers:

Make Loan Payments in Timely Fashion

Establishing credit is the first step in obtaining a good credit score. So, if your first-time buyers haven’t already set up a loan or line of credit with a credit card company, encourage them to do so…now.

If your first-time buyers are looking to improve their credit scores, encourage them to use their credit cards to make “responsible” purchases and pay the credit card bill on time, every time.

Also encourage your first-time buyers to check their credit reports regularly and keep track of any late payments that may have slipped by them. Then, resolve any discrepancies they found with either the creditor who notified the credit bureau or the credit bureau itself.

Diversify Credit

Opening a new account may help build first-time buyers’ credit scores. Taking on installment debt may also help build credit scores.

Why?  Because it demonstrates to lenders that your first-time buyers can manage multiple types of loans.

On the other hand, when considering buying a new home, first-time and any time homebuyers ought to hold off opening any new lines of credit and/or making any type of new, large purchase such as a car.

According to John Ulzheimer, a former credit insider and author of many books on credit, “If you are in the process of buying a home, then that should be your one and only credit.”

Do NOT Close Out/Cancel Credit Sources

Encourage your first-time buyers to keep all credit source/lines open or unused/lightly used while making payments in a timely fashion. Closing or canceling those credit sources, even when not being used, may lower your first-time buyers’ overall available credit.

Marc Souza, CitiArea Lending Manager, said, “You’re better off using that credit card for a small payment at the grocery store, and then paying it off at the end of the month.”

Student Loans – An Asset or a Hindrance?

As long as your first-time buyers have been regularly paying a defined amount of their student loan debts, lenders will be impressed.

If your first-time buyers are deciding whether or not to consolidate their student debts, suggest they first talk with a credit expert

Improvements in Debt-to-Income Ratios

Your first-time buyers debt-to-income (DTI) ratios, or the amount of their gross monthly income that goes toward monthly debts, are highly impactful of your clients’ abilities to obtain a home mortgage.

The lower the DTI, the better in “demonstrating” to lenders that your first-time buyers can pay their monthly home loan payments.

One way to improve a DTI ratio is to pay off all of a smaller loan while simultaneously making the minimum monthly payments on other debt.

Another way to improve a DTI ratio is to lower you first-time buyers’ debt to credit limit, or a credit utilization ratio.  Let’s say your first-time buyers have a total of $20,000 on two credit cards with a balance of $10,000 on one card, the credit utilization ratio would be 50%.  A low credit utilization ratio impacts credit scores positively.

Thanks to NerdWallet, National Association of REALTORS®, and CitiBank.

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