In the Ask Savvy community group, reader Mrs-B wonders if she should wait for her poor credit score to improve before buying a home.
I reached out to credit expert Bethy Hardeman from CreditKarma.com, a free credit management service that provides free credit scores, financial education, and personalized savings recommendations. The firm helps more than three million consumers realize the everyday cost savings of having a good credit score.
I recently got married and want to buy a house in a year. Problem is, my husband bought one about a year and a half ago (before we got married). He cannot take out another mortgage yet so it will have to be in my name. I have poor or fair credit but am trying to fix it. I messed up my credit when I was 18 (those first time savings are tempting!), let it get bad until two years ago, and have raised my score almost 70 points since March. It's still not good enough though. I have a new secured credit card which should help, but I also have three student loans in deferment. Is it better to wait for my score to improve since some negative things will be cleared from my credit report within six to eight months, or take the smallest loan out of deferment and start paying it off? We need to save for a down payment, but a good credit score is important too.
Here are some reasons why Bethy thinks Mrs-B should wait for a good credit score:
Should I buy a home, or should I wait?
First of all, kudos to you for raising your credit score 70 points in the past six months! You must be doing lots of things right with your credit. But even though it may seem like a good time to buy a house because home prices and mortgage rates are at historic lows, it’s wiser to wait for your credit to improve even more. Before you make a decision, let’s take a look at both sides:
The case for buying
First, ask yourself why you want to buy a home so soon. Is it because you want to build equity in homeownership? Do you prefer owning to renting? Is the housing market in your area ripe for buying? All of these can be great reasons to want to invest in a home.
Although renting allows you the time to save up a bigger down payment and build your credit, it doesn’t help you build any equity. Buying a home gives you that opportunity, especially because prices are low and the housing market should be shaping up in the next few years. It’s a long-term investment that can really pay off in the long run when it’s time to sell.
Read on to find out more.
When it comes to general sentiment about the housing market, most Americans think it’s a buyer’s market, and that housing prices will continue to decrease. Those who were skeptical before about buying a home may now be looking toward inexpensive, bank-owned properties. Imagine that instant gratification of being a new homeowner! But does that mean it’s time for you to buy a home?
The case for waiting
There are three factors that lenders use to decide whether or not to approve you for a mortgage:
1. Your credit score: During the lending boom, mortgage lenders would approve a credit score of as low as 580 for a subprime mortgage. However, that has all changed. Now, a credit score of 660 or below is typically considered subprime, and a score of 680 or below will get you higher rates and poorer loan terms. These days, in order to get the best interest rates and save the most money, you need a credit score of 720 or higher.
2. Your down payment: If your credit score isn’t what it should be, be prepared to have somewhere between a 10 and 20 percent down payment. In the past, you could get a mortgage with no down payment. Now, you’d be hard-pressed to find a lender offering 100 percent financing.
3. Your income: Although not a factor in your credit rating, it will come into play as you apply for a mortgage. Your mortgage lender needs to know that you can make your payments on time and in full each month. Not only will you have to report your income, but you’ll also be required to provide proof of income, such as tax returns and paystubs.
The Bottom Line: Take a look at your situation as it relates to your credit score, your down payment savings and your income. Take some time to continue building up a down payment and your credit—two factors you can control. Monitor your credit score on CreditKarma.com and aim at a 720 or higher for the best mortgage rates. Remember that an interest rate different of a percentage point or two actually translates into several thousands of dollars over the lifetime of a mortgage.