The coronavirus pandemic has led to record-high unemployment rates not seen since the Great Depression. And this is particularly worrisome for would-be home buyers.
If you were among the 23.1 million Americans who were laid off or furloughed, you might be worried about your financial future. And if you were hoping to buy a house—either now or in the next few years—you might also wonder how your current jobless status might affect those plans.
While the situation might seem dire, unemployment does not mean that home-buying plans have to be put on hold for long. Here’s how to navigate a period of unemployment so that it doesn’t derail your hopes to buy a home.
Can you buy a home if you’re unemployed?
For starters: If you lose your job while in the midst of home shopping or after you’ve even made an offer, you might have to put the purchase on hold.
The reason: Given your reduced income, the odds of lenders loaning you money for a property purchase are slim, unless your spouse or partner has a sizable income that can carry the mortgage alone.
And even if you’re getting unemployment checks every week, that money is considered temporary income, so it can’t be used to qualify for a mortgage, says Jackie Boies, senior director of housing and bankruptcy services at Money Management International, a nonprofit providing financial education and counseling.
In short, “unemployment could have an effect on your ability to purchase a home in the short term,” Boies says.
But the good news is that once you find a new job, you can likely resume home shopping without trouble, Boies adds. “Unemployment shouldn’t have a long-term effect on being able to buy a home.”
How long after unemployment can you buy a home?
But even once you do find a new job, that doesn’t mean you can easily buy a house just yet. That’s because lenders like to see a steady history of employment before loaning someone money.
“Regular employment must be reestablished as stable, reliable, and dependable,” says Karma Herzfeld, mortgage loan originator at Motto Mortgage Alliance in Little Rock, AR.
So how long is enough? Lenders typically require borrowers to have six months of employment at their current job, and two years of continuous employment. Breaks in employment older than two years shouldn’t affect getting a mortgage.
How unemployment affects your credit score
While unemployment doesn’t jeopardize future home-buying hopes per se, financial experts warn that what can put those plans at risk is how you handle your finances while jobless. Unemployment, after all, can stress your budget in ways that can damage your credit history and credit score.
Lenders check your credit score to assess how well you’ve managed past debts. Scores between 650 and 700 range from fair to good; scores below 650 are considered subpar, which could limit which lenders are willing to loan you money for a house. (You can check your score for free on sites like Credit Karma.)
Credit scores can be damaged in a variety of ways during unemployment. For one, if you get behind on paying bills, this will put some blemishes on your credit history and drag your score down.
Unemployment can also lower your credit score by negatively affecting your debt-to-income ratio, a calculation used by mortgage lenders to compare how much you make against how much you owe.
If you’re unemployed, you may face a double whammy as your income is lower and you’re charging more to your credit cards, thus increasing your debt. Both moves can negatively affect your debt-to-income ratio, which may make lenders leery of loaning you money.
“Any factor that affects income or debt may affect the debt-to-income ratio,” Herzfeld explains.
In sum, hopeful home buyers should be careful not to take on too much debt, even while unemployed. You need to preserve cash as best you can.
“I recommend, if on unemployment, [you] cut back on all discretionary spending and make every effort to keep bills current so that the credit score may not get negatively impacted,” Herzfeld says.
Debt-to-income ratio will likely rebalance once you return to work, as long as you haven’t racked up too much debt during the period of unemployment, Boies says.
How to handle your finances while unemployed
“My recommendation is to always try as best as you can to pay at least the minimum required payment on all monthly debt obligations, otherwise credit may be negatively affected,” Herzfeld says.
Boies suggests reaching out to landlords, credit card companies, utilities, auto lenders, and others to find out what options you have, such as payment plans, deferments, or forbearance. You might also be able to reduce some bills, such as insurance, by reviewing your policy.
“Don’t think that if you can’t pay that bill, you just can’t do anything about it,” Boies says. “You need to reach out to see what options they have available to you.”
How to bounce back from unemployment
If your credit score is negatively affected while you’re unemployed, it’s not the end of the world—but it will take time to repair.
Six months to a year or more of positive credit rebuilding could get you on track to buy a home, Herzfeld says.
“The sooner past-due debts can be remedied, the sooner the score may begin to improve,” she says.
Getting a mortgage, paying your mortgage, refinancing your mortgage: These are all major undertakings, but during a pandemic, all of it becomes more complicated. Sometimes a lot more complicated.
But make no mistake, home buyers are still taking out and paying down mortgages during the current global health crisis. There have, in fact, been some silver linings amid the economic uncertainty—hello, record-low interest rates—but also plenty of changes to keep up with. Mortgage lending looks much different now than at the start of the year.
Whether you’re applying for a new mortgage, struggling to pay your current mortgage, or curious about refinancing, here’s what mortgage lenders from around the country want you to know.
1. Rates have dropped, but getting a mortgage has gotten more complicated
First, the good news about mortgage interest rates: “Rates have been very low in recent weeks, and have come back down to their absolute lowest levels in a long time,” says Yuri Umanski, senior mortgage consultant at Premia Relocation Mortgage in Troy, MI.
That means this could be a great time to take out a mortgage and lock in a low rate. But getting a mortgage is more difficult during a pandemic.
“Across the industry, underwriting a mortgage has become an even more complex process,” says Steve Kaminski, head of U.S. residential lending at TD Bank. “Many of the third-party partners that lenders rely on—county offices, appraisal firms, and title companies—have closed or taken steps to mitigate their exposure to COVID-19.”
Even if you can file your mortgage application online, Kaminski says many steps in the process traditionally happen in person, like getting notarization, conducting a home appraisal, and signing closing documents.
As social distancing makes these steps more difficult, you might have to settle for a “drive-by appraisal” instead of a thorough, more traditional appraisal inside the home.
“And curbside closings with masks and gloves started to pop up all over the country,” Umanski adds.
2. Be ready to prove (many times) that you can pay a mortgage
If you’ve lost your job or been furloughed, you might not be able to buy your dream house (or any house) right now.
“Whether you are buying a home or refinancing your current mortgage, you must be employed and on the job,” says Tim Ross, CEO of Ross Mortgage Corp. in Troy, MI. “If someone has a loan in process and becomes unemployed, their mortgage closing would have to wait until they have returned to work and received their first paycheck.”
Lenders are also taking extra steps to verify each borrower’s employment status, which means more red tape before you can get a loan.
Normally, lenders run two or three employment verifications before approving a new loan or refinancing, but “I am now seeing employment verification needed seven to 10 times—sometimes even every three days,” says Tiffany Wolf, regional director and senior loan officer at Cabrillo Mortgage in Palm Springs, CA. “Today’s borrowers need to be patient and readily available with additional documents during this difficult and uncharted time in history.”
3. Your credit score might not make the cut anymore
Economic uncertainty means lenders are just as nervous as borrowers, and some lenders are raising their requirements for borrowers’ credit scores.
“Many lenders who were previously able to approve FHA loans with credit scores as low as 580 are now requiring at least a 620 score to qualify,” says Randall Yates, founder and CEO of The Lenders Network.
Even if you aren’t in the market for a new home today, now is a good time to work on improving your credit score if you plan to buy in the future.
“These changes are temporary, but I would expect them to stay in place until the entire country is opened back up and the unemployment numbers drop considerably,” Yates says.
4. Forbearance isn’t forgiveness—you’ll eventually need to pay up
“The CARES Act is not designed to create a freedom from the obligation, and the forbearance is not forgiveness,” Ross says. “Missed payments will have to be made up.”
You’ll still be on the hook for the payments you missed after your forbearance period ends, so if you can afford to keep paying your mortgage now, you should.
To determine if you’re eligible for forbearance, call your loan servicer—don’t just stop making payments.
If your deferment period is ending and you’re still unable to make payments, you can request delaying payments for additional months, says Mark O’ Donovan, CEO of Chase Home Lending at JPMorgan Chase.
After you resume making your payments, you may be able to defer your missed payments to the end of your mortgage, O’Donovan says. Check with your loan servicer to be sure.
5. Don’t be too fast to refinance
Current homeowners might be eager to refinance and score a lower interest rate. It’s not a bad idea, but it’s not the best move for everyone.
“Homeowners should consider how long they expect to reside in their home,” Kaminski says. “They should also account for closing costs such as appraisal and title insurance policy fees, which vary by lender and market.”
If you plan to stay in your house for only the next two years, for example, refinancing might not be worth it—hefty closing costs could offset the savings you would gain from a lower interest rate.
“It’s also important to remember that refinancing is essentially underwriting a brand-new mortgage, so lenders will conduct income verification and may require the similar documentation as the first time around,” Kaminski adds.
6. Now could be a good time to take out a home equity loan
Right now, homeowners can also score low rates on a home equity line of credit, or HELOC, to finance major home improvements like a new roof or addition.
“This may be a great time to take out a home equity line to consolidate debt,” Umanski says. “This process will help reduce the total obligations on a monthly basis and allow for the balance to be refinanced into a much lower rate.”
During the current financial crisis, you may ponder the idea of simply stopping payment on your mortgage. It is an option that some may want to consider in difficult times, but it is a bad decision all the way around.
The reason: It will affect your credit for years to come and is likely to result in the loss of your home. As a topper, the bank doesn’t really want your house. Lenders are willing to help and would rather not foreclose.
So don’t adopt the tactic of pooh-poohing your payment and hoping for the best.
According to the Mortgage Bankers Association, almost 7% of all mortgage loans are currently in forbearance as of April 19. That’s up from just under 6% the week before. To give some perspective, at the beginning of March, the number was just 0.25%.
While some mortgage holders are asking for help, the temptation not to pay is real. Let’s reiterate: It is a bad idea.
What happens if I don’t pay my mortgage?
If you don’t pay your mortgage, it will set you on the path to foreclosure, which means losing your house.
A mortgage is a legal agreement in which you agree to pay a certain amount to a lender for a certain number of years. Failing to pay violates that agreement.
Right now, federal (and some state) foreclosure proceedings are paused, but they will resume as soon as the economy begins to open up again. In some states, that may be imminent. The idea behind the pause was to ensure that people made it through the shelter-in-place orders with a place to shelter.
“This is not a moratorium that [lenders] will never foreclose again,” says Mary Bell Carlson, an accredited financial counselor known as Chief Financial Mom.
“You need to take this seriously and not just stop paying. Because if you stop paying and it adds up, you’re going to be first on the list to foreclose on when the economy reopens.”
Consequences of missing payments
Mortgage payments are due the first of each month and are considered late after the 15th of the month. That’s when late fees, penalties, and correspondence from the loan servicer begin.
“First off, you’ll get a letter in the mail from your servicer which says you owe x amount and it must be paid by this date,” Carlson says. The letters will outline any penalties and late fees and will often include an offer of help.
“The bank is not in the business of owning homes—that’s not what they want to do,” she says. “They’re not looking to take over your house.”
She adds that lenders want to work out solutions to keep you in your house and avoid lengthy foreclosure proceedings.
Meanwhile, be wary if you receive a call or an email from someone saying they’re your lender and you haven’t paid. It’s probably a scam, says Carlson. Your lender will send notifications via the postal service.
Will not paying my mortgage damage my credit score?
Your loan will go into default after 30 days of nonpayment. The mortgage servicer will probably file a notice of default with your local government and report the nonpayment to the credit bureaus, which will negatively impact your credit score.
“The credit is the first thing that gets hit. Your credit will take a nosedive if you stop paying your mortgage,” Carlson says.
“If you just close your eyes and stop paying, your credit is going to dissipate, and it takes years for those things to fall off.”
A low credit score may impact your future ability to get a mortgage or to rent.
“No one is going to want to rent to somebody who has just declared bankruptcy or has been foreclosed on, because that’s going to be a huge red flag,” Carlson warns.
As you continue to miss payments, penalties, interest, and correspondence from lenders will accumulate. Eventually, you’ll get a notification that the foreclosure process is underway.
How long will it be before foreclosure?
The foreclosure process is different in each state, so the process and its length may vary. Carlson says the process often begins in earnest after about six months of nonpayment.
She added that from the time of the first missed payment to about the six-month mark, lenders will work on solutions to avoid foreclosure. But if they don’t hear from you then, be prepared to lose your home.
“At the six-month point, they say, ‘OK, all options are off the table at this point. You’re unwilling to work with us, we’re going to start foreclosure,’” says Carlson.
When this happens, the entire loan becomes due and repayment plans are no longer an option.
The timeframe varies by state, but sometimes as quickly as six months after the first missed payment, a lender can list the home for sale or hold an auction. A homeowner will have to vacate.
The current economic climate is delaying foreclosures, but proceedings will resume once states begin to lift suspension orders.
What do I do if I’m struggling to pay my mortgage?
If you’re having difficulty making mortgage payments, there are options. Some will help keep you in your house, while others will protect some of your credit. But don’t bury your head in the sand and simply stop paying.
“Communicating with your lender is the key,” Carlson advises. “So if you cannot pay, the communication methods need to—and must be—open to communicate that to your lender and discuss the options you have.”
Here are a few of the common options if you want to stay in your home:
Forbearance: A lender allows a borrower to pause payments for a period of temporary hardship, sometimes waiving late fees or penalties. Interest will often still accrue. At the end of the forbearance period, the missed payments become due. Forbearance is a good option if the financial situation is a short-term setback.
Loan modification: Changing the terms of the loan and payments is possible. Often, this involves a divorce, job change, or an unexpected increase in expenses. Loan modifications are a tactic to deploy if you want to stay in your home, but can no longer afford the current payments.
Repayment plan: If you are a few payments behind and think you can catch up, one option might be a repayment plan allowing you to make a lesser payment temporarily, until your finances are back on track.
Some alternatives if you don’t want to stay in your home and would rather walk away:
Deed-in-lieu: In exchange for partial or total debt forgiveness, you voluntarily give ownership of the home back to the lender. This is usually when foreclosure is imminent, and you can no longer afford the payments and do not want to sell the property yourself.
Short sale: If you want to sell the home yourself and owe more than the home is worth, you could ask your lender if you could do a short sale. The property usually sells for less than the balance of the mortgage.
These options may hurt your credit, but not as badly as a foreclosure.
If you’re hoping to buy a house soon, one little number you’ll want to bring up to snuff is your credit score. Your credit score is a numerical summary of your credit report, a detailed document outlining how well you’ve paid off past debts—to your credit cards, college loans, and any place you owe money.
Lenders check your credit score as a way to gauge whether to give you more credit in the form of a home loan. If your credit score is high, you’re considered creditworthy, which bodes well for your chances of getting a good mortgage. If your credit score is low, though, lenders might worry whether you’ll default on your home loan, and deny you a mortgage (or charge you a premium for it).
In other words: A good credit score is key to the home-buying process. Here’s more on who calculates your credit score, how to get a free credit score check, what counts as a good credit score, and some ways to improve your credit score fast.
Credit score basic No. 1: Who calculates your credit score?
Credit scores are calculated by three credit bureaus: Experian, Equifax, and TransUnion. Each of these credit bureaus comes up with a credit score in slightly different ways. For instance, Experian includes your rent payments in your credit report and credit score; TransUnion factors in your employment history. But rest assured all three of these bureaus’ credit scores should be roughly the same.
Credit score basic No. 2: How is your credit score calculated?
The main variables that go in your credit report that make up your credit score are the following:
Credit payment history (35%): This is whether you pay your credit cards on time.
Debt-to-credit utilization (30%): This is how much debt you’ve accumulated on your credit accounts, divided by the credit limit on these accounts. Debt-to-credit utilization ratios above 30% work against you.
Length of credit history (15%): Longer credit history balances are more favorable than shorter ones; ideally you need at least six months to establish credit and have a credit score tallied. (Here’s more on how to build a credit history from scratch.)
Credit mix (10%): Your credit score goes up if you have different types of credit card accounts (e.g., credit cards, store credit cards, car/college loans, and more).
New credit accounts (10%): Opening new credit accounts can increase your debt-to-credit utilization, although new credit lines may also work against you. How? Each time you open a new credit line, the average length of your credit history decreases, hurting your credit score. So be sure to weigh the pros and cons of opening new credit accounts.
Credit score basic No. 3: How to get a free credit score check
Have no clue what your credit score is? You can get your free credit score online at CreditKarma.com. You can also check with your credit card company, since some offer a free credit score, too.
To dive into more details on what determines your credit score—as well as any problems dragging your credit score down—you’ll need to get your full credit report. You can get a free credit report once a year at AnnualCreditReport.com.
Credit score basic No. 4: What is a good credit score?
A credit score can range from 300 to 850; 850 is a perfect credit score. Wondering if your credit score is up to snuff? Here are the general credit score ranges.
Perfect credit score: 850
Excellent credit score: 760–849
Good credit score: 700–759
Fair credit score: 650–699
Low credit score: 650 and below
Wondering where most people stand with their credit scores? The average credit score hovers around 695. Alas, only about half of consumers have a credit score that falls in the optimal 700-plus range. Here’s more on what counts as a good credit score, and why.
Credit score basic No. 5: What credit score do you need to buy a house?
While it varies by area and type of loan, generally lenders will look for a credit score of 660 or higher to grant a mortgage. Although you certainly can get a mortgage with a good credit score, you’ll need a credit score of 740 or higher to get the best interest rates.
And an excellent credit score translates to real savings. In fact, one report by credit site Lending Tree found that if home buyers get a 30-year fixed-rate mortgage averaging $234,43, home buyers with very good credit scores (of 740 to 799) will save $29,106 more in interest payments over the life of the loan than those with a so-so credit score (of 580 to 669).
Got bad credit? There’s still hope: Federal Housing Administration loans allow borrowers with credit scores as low as 500 to qualify for a mortgage with a 10% down payment; their credit scores must hit 580 to snag loans that require only 3.5% down payments. (Here’s more on the minimum credit score you need for a home loan.)
Credit score basic No. 6: Why to check your credit score long before you buy a home
It’s important to check your credit score many months before you buy a home. The reason? It takes time to improve your credit score. In fact, one survey by credit bureau Experian found that 45% of people wait for their credit scores to improve before applying for a mortgage.
But they don’t just kick back and wait and pray that their credit score improves. It takes some work to improve your credit score—and knowing what to do.
How to improve your credit score—and how long it’ll take
So let’s say you’ve checked your credit score and credit report and found it’s less than stellar. What can you do to improve your credit score, and how long will it take?
While a good credit report and credit score aren’t built (or, for that matter, destroyed) overnight, there are still some things you can do right now to boost your credit score fast. Here are some sneaky yet totally legit ways you can improve your credit score in record time.
Credit score booster No. 1: Check for credit score errors
For starters, a low credit score may not be entirely your fault. One in four Americans actually finds errors on their credit file, according to a Federal Trade Commission survey on Americans’ credit scores. Credit score errors are common because creditors make mistakes with reporting. For example, although you may have never missed a credit card payment, someone with the same name as you did miss a credit payment—and your bank recorded the error on your credit account by accident.
This is why it’s important to do a free credit check and look for any errors that could be dragging down your credit score. If you find some errors, you can remove them from your credit report by contacting the credit bureaus (Equifax, Experian, and TransUnion) with proof that the credit information was amiss. From there, the credit bureaus will remove these flaws from your credit report, which will later be reflected in your credit score.
Estimated time it’ll take to improve your credit score: If it’s an identity error (like a credit card that’s not yours showing up on your credit report), this type of credit error can be fixed in one to two months. However, if it’s an error on your own credit card account, it may take longer to be reflected in your credit score, since you’ll need to contact your credit card company as well as the credit bureaus. In this case, expect to wait up to three months before this mistake is purged from your credit report, and be reflected in your credit score.
Credit score booster No. 2: Pay down your credit debts
Paying down your debt is the thing you can do that could have the biggest—and fastest—impact on your credit score. Credit utilization (or the amount you can borrow in credit versus the amount of debt you’re carrying) accounts for 30% of your credit score. And the more available credit you have, the better.
If you have the cash on hand, try to time your credit payments so you’re reaping the credit-reporting benefits.
“The easiest way to optimize your credit utilization is to use a credit card and pay your balance down to 1% of your credit limit right before your bank reports to the credit bureaus,” says Liran Amrany, founder and CEO of Debitize, a financial technology company that automates better money and credit habits.
“You want to have positive credit utilization so it’s clear you are using the card, but otherwise you want your credit utilization to be as low as possible,” adds Amrany.
Not sure when your creditor reports? You could call them up and ask, or you can check your credit report. According to Amrany, you want to pay before the date last reported.
Estimated time it’ll take to improve your credit score: One month.
Credit score booster No. 3: Get your credit bills current
You hopefully already know that you have to pay your bills on time to get a good credit score. If you’re already late on a payment, pay that puppy ASAP for a quick credit score boost.
“Because paying credit bills on time is the most important factor in a credit score, going from paying one or more credit bills late each month to paying all on time could show an improvement in one to two months,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.
Bonus: If you’re less than 30 days late on a credit card bill and you can make the payment today, do it! Creditors don’t typically report until after the 30-day mark.
Estimated time it’ll take to improve your credit score: One to two months.
Credit score booster No. 4: Open a new credit card account
Opening a new credit card account can help improve your credit score in two ways.
First: “If you open up a new card, which increases your total outstanding credit line, your credit utilization should improve,” Amrany says.
Second: If you have only one type of credit card or a small loan, opening another type (like a store card) can help your “credit mix,” a term the credit bureaus use to indicate whether a person can handle different kinds of credit accounts.
Estimated time it’ll take to improve your credit score: One to six weeks, based on processing and reporting your new account. Just don’t go nuts—try opening just one new credit account, at least at first. If you apply for a card every time you’re asked whether you want 10% off your purchase, the rash of credit injuries will negatively affect your credit score.
Credit score booster No. 5: Become an authorized credit card user
Have a responsible partner or family member who always pays their credit card bills on time? Becoming an authorized user on one of their credit card accounts will let you piggyback onto their good credit history.
“The full history of the other account shows up on your credit report immediately,” Gallegos says. “And when this older, established credit account is added to your credit history, it results in an increase in the average age of accounts you’ve ‘managed’ (which also increases your credit score).”
Just be careful to make sure the person you choose actually pays his bills on time and keeps the debts low—just like good credit history, bad history will show up, too.
Estimated time it’ll take to improve your credit score: Immediately.
Credit score booster No. 6: Get a secured credit card or loan
If you’re having trouble qualifying for a traditional credit card, try for a secured credit card, which is “secured” by a deposit. This means that if you default or stop paying, your deposit will be used to pay off the account. This lowers the risk involved for the lender, which makes it more likely to offer you credit even if you don’t have an established credit history.
Estimated time it’ll take to improve your credit score: One to two months.
And while you’re at it, make sure to keep all your credit cards open, whether you use them or not. As long as they aren’t charging you any annual fees, that is. The reason? Closing accounts might increase your credit utilization ratio, which won’t be good for your score.
How long does negative info remain on your credit report and affect your credit score?
This depends on what the credit issue is. For instance, credit delinquencies will typically remain on your credit report for seven years. Bankruptcies will remain on your credit report for 10 years. Credit inquiries—where someone pulls your credit report like a lender or credit card company—remain on your report for two years.
Does paying your noncredit-card monthly bills improve your credit score, too?
Can you add to your credit history (and improve your credit score) by calling other providers—like your wireless provider or utility company—and asking them to report your payment history to your credit report? It sounds like a pretty good idea, but it’s one that’s still in its infancy.
“Each of the major credit-reporting agencies is making some changes to include more bill payments, albeit slowly. In general, though, most of the time, these types of payments only appear on credit reports when they are delinquent,” Gallegos says.
The light at the end of this credit score tunnel is that in early 2019, you will be able to add utility and telecom payment histories to your credit score by signing up for a free credit platform called Experian Boost. To register for early access, you can submit your info and it will be added to your credit report and credit score as soon as this option is available.
So, this last credit move probably won’t improve your credit score right now, but there are still plenty of things you can do to kick-start your credit score makeover. So what are you waiting for?
Watch: What’s the Magic Number? The Credit Score You Need to Buy a Home
How long does it take to build credit history? If you ever plan to buy a house, establishing a track record of past payments is essential, because it proves to mortgage lenders that you’ve paid people back (which means they’ll be more apt to loan you money for a home).
Still, if you have no credit history—because you’re young or just never bothered—how long does it take to build it from scratch?
Here’s the straight dope: Done right, it can take as little as six months. Done wrong? It can take several years. So if you’re in a rush to establish credit to buy a home, you’ll want to know the right way to go about it! Heed this advice to learn what to do.
How long does it take to build credit?
At a minimum, you need to open at least one credit card in your name. From there, you just need to make a purchase using the card, and then make a payment. Once you’ve made your payment, your creditor will report your payment to one or more of the major credit bureaus (TransUnion, Equifax, and Experian).
“Typically, it takes at least three to six months of activity before a credit score can be calculated,” says Tracy East, director of communication at Consumer Education Services in Raleigh, NC.
Once you’ve established credit, you still have some work to do. Credit histories are scored based on performance, much like the grades you got in school. Healthy credit behavior—like on-time payments and staying well below your credit limit—lead to a higher credit score.
What’s more, there are two types of scores: VantageScores and FICO scores. Some mortgage lenders may look at a VantageScore, but FHA lenders are required to use FICO scores.
“After opening their first credit account and beginning to make timely payments, it will take at least three months for the person to generate a VantageScore, and six months to have enough information to create a FICO score,” says Martin Lynch, compliance manager and director of education at Cambridge Credit Counseling of Agawam, MA.
And the longer you demonstrate good credit behavior, the higher your score can climb from there. In other words, a couple of on-time payments is nice, but years and years of on-time payments is far more impressive, and reflected in your score accordingly. In fact, the length of your credit history can count for as much as 15% of your credit score.
What credit score do you need to get a mortgage?
Your initial credit score when building credit will typically be in the 660s, which is considered on the low end of “fair” (fair scores range from 650 to 699). It could be just enough to buy a house with some lenders, but not all, because lenders vary regarding the minimum credit score they will accept.
You should also know that while a “fair” score may get you a mortgage, it won’t qualify you for the best mortgage—in terms of interest rates and other deals. To get better mortgage rates, you will need a good score (700 to 759) or an excellent score (760 or higher). Unfortunately, achieving these scores will take (you guessed it) more time.
How to speed up the credit-building process
To establish a payment history, use your card reasonably. Make payments on time (or early, if possible). Setting up automatic payments can help. East recommends keeping your balance below 30% of your credit limit and, ideally, paying it off in full each month. These simple steps will eventually push your score from fair to good to excellent, allowing you to get the best rates for your mortgage.
Here are some other ways to speed up the credit-building process and ensure your credit history and score get off to a good start.
Become an authorized user on someone else’s account. This can be a parent, friend, or relative who has had the account for at least a few years and has a good payment history. You don’t need to use the account or even have a card. Once you’re added as an authorized user and that fact is reported to the credit bureaus, it will instantly affect your credit and may generate a score if you don’t already have one or, at least, give it a boost.
Get a secured credit card or loan. If you’re having trouble qualifying for a traditional credit card, try for a secured credit card, which is “secured” by a deposit. This means that if you default or stop paying, your deposit will be used to pay off the account. This lowers the risk involved for the lender, which makes it more likely to offer you credit even if you don’t have an established credit history.
Also know that when it comes to mortgages, your credit score is just one piece of a larger puzzle. According to Lynch, your lender will also look at your employment history, how long you’ve lived at your current residence, and your credit references.
Curious about how to buy a house in your 20s? If you’re dubious it can be done, we get it. Between entry-level salaries, college loans, and the desire to just be young and have fun, 20-somethings often think homeownership is beyond their reach.
No so! It is entirely possible to buy a home in your 20s, and it will benefit you big-time down the road. Here’s how you can make your home-buying dreams come true much sooner than you think.
How to buy a house in your 20s: Save for a down payment
To buy a house at your age, you’d better have some cash saved up for a down payment on your mortgage—a lot of cash, actually.
Most financial planners recommend that home buyers make a down payment amounting to 20% of the price of the home. So on your typical $250,000 house, that would amount to $50,000. Ouch!
Granted, you don’t have to put down 20%, but doing so enables you to avoid paying private mortgage insurance, a premium that can increase your monthly payment by up to 1.15%.
If you don’t have a ton of money in savings, one way to afford the down payment is to ask Mom and Dad for financial help. Another option to foot the down payment bill is to apply for down payment assistance. Depending on your income and other factors, you could qualify for one of over 2,200 down payment assistance programs nationwide, which help out home buyers with low-interest loans, grants, and tax credits.
So, how much money are we talking about? Well, one study found that buyers who use down payment assistance programs save an average of $17,766. Sadly, most consumers aren’t aware of these programs, or assume they’re too difficult to qualify for. Don’t be one of them!
Shore up student loan debt
Student debt has surged to an average of $28,950 per borrower, reports the Institute for College Access & Success. But college debt doesn’t automatically prevent you from being able buy a house.
Most mortgage lenders require a borrower’s debt-to-income ratio—how much money you owe divided by your income—to be no more than 36%. So, someone making $6,000 a month and paying $500 a month in student debt would be able to afford a maximum monthly mortgage payment of $1,680—in many markets, that’s plenty to buy a house. But, if you’re shouldering too much student loan debt to qualify for a mortgage, you may still have a few options.
One way to make room for a mortgage is to refinance and extend the life of your college loan. This results in smaller monthly payments over a longer period of time, so you’ll have more you can put toward a mortgage. The caveat is you’ll end up paying more in interest over the life of your college loan, but it means you can buy a home now and, in turn, take advantage of today’s low mortgage interest rates, says Heather McRae, a senior loan officer at Chicago Financial Services.
Moreover, nearly half of states today offer housing assistance to college grads carrying student loan debt. For instance, New York’s new Graduate to Homeownership program provides assistance to first-time buyers/college grads in the form of low-interest-rate mortgages or up to $15,000 in down payment assistance. You can meet with a mortgage lender to find out if you qualify for one of these programs.
Check your credit score
Unlike older generations, home buyers in their 20s tend to have shorter credit histories. That can be a problem, since if you have limited credit history, the odds are greater that you have a mediocre credit score—the numerical representation of how well you’ve paid off past loans (like credit cards).
Mortgage lenders usually require borrowers to have a minimum credit score of 660; they also look at your credit utilization ratio—your current debts, divided by the credit limit on the sum of your accounts. For example, if you’re carrying a $400 debt on your credit card and have a $1,000 credit limit, your credit utilization ratio is 40%. Unfortunately, relatively new credit users tend to have higher credit utilization ratio.
You’ll want to get a free copy of your credit report at AnnualCreditReport.com. Check for errors—1 in 4 Americans spots mistakes on their credit report, according to a Federal Trade Commission survey. And, if your credit isn’t up to par, you may have to take a few months to raise your score. Or you can get someone with good credit (like your parents) to co-sign the loan for you.
Purchase a starter home
As a young home buyer, you don’t have to find your “forever home” right now.
“I tell young buyers all the time, ‘This is your first home—it’s not your last,’” says Linda Sanderfoot, a real estate agent at Coldwell Banker in Neenah, WI.
In fact, there are a couple of big financial benefits to buying a starter home while you’re in your 20s. First, your mortgage payments will probably be more affordable, since you’ll likely be buying a cheaper house. Second, you may be able to get a 5- or 7-year adjustable-rate mortgage and qualify for a lower interest rate than you would with a 30-year fixed loan—a good decision as long as you plan on moving before the loan’s interest rate lock expires.
Plan for unexpected home expenses
All home buyers should have a rainy day fund to pay for emergency home repairs such as roof damage or a gas leak. And this is especially important for young buyers. Why? Research shows many millennials are less financially responsible than older generations. A study by TD Ameritrade found that more than 9 in 10 millennials overspend, fall short on savings, or take on additional debt at least once a month per year. Furthermore, a recent GoBankingRates.com survey found 52% of millennials said they feel pressure to keep up with their friends due to always going out.
Consequently, “Don’t buy at the top of your budget,” says Sanderfoot. “Unless you’re buying new construction, you need an emergency fund for big repairs.”
She adds that home buyers may also want to get a home warranty, which is a policy that would cover the cost of repairing certain home appliances if they break down. (Plans start at about $300.)
Picture this nightmare: You apply for a mortgage, but your application gets rejected. Suddenly, you’re hit with an overwhelming wave of embarrassment, shock, and horror. It’s like having your credit card denied at the Shoprite. So. Much. Shame.
Sadly, this is a reality for some home buyers. According to a recent Federal Reserve study, one out of every eight home loan applications (12%) ends in a rejection.
There are a number of reasons mortgage applications get denied‚ and the saddest part is that many could have been avoided quite easily, had only the applicants known certain things were no-nos. So, before you’re the next home buyer who gets burned by sheer ignorance, scan this list, and make sure you aren’t making any of these five grave mistakes, which could land your mortgage application in the “no” pile.
1. You didn’t use credit cards enough
Some people think credit card debt is the kiss of death … but guess what? It’s also a way to establish a credit history that shows you’ve got a solid track record paying off past debts.
While a poor credit history riddled with late payments can certainly call your application into question, it’s just as bad, and perhaps worse, to have little or no credit history at all. Most lenders are reluctant to fork over money to individuals without substantial credit history. It’s as if you’re a ghost: Who’s to say you won’t disappear?
According to a recent report by the Consumer Financial Protection Bureau, roughly 45 million Americans are characterized as “credit invisible”—which means they don’t have a credit report on file with the three major credit bureaus (Equifax, Experian, and TransUnion).
There’s a silver lining, though, for those who don’t have credit established. Some lenders will use alternative data, such as rent payments, cellphone bills, and school tuition, to assess your credit worthiness, says Staci Titsworth, a regional manager at PNC Mortgage in Pittsburgh.
2. You opened new credit cards recently
That Macy’s credit card you signed up for last month? Bad idea. New credit card applications can ding your credit score by up to five points, says Beverly Harzog, a consumer credit expert and author of “The Debt Escape Plan.”
That hit might seem minuscule, but if you’re on the cusp of qualifying for a mortgage, your new credit card could cause your loan application to be denied by a lender. So, the lesson is simple: Don’t open new credit cards right before you apply for a mortgage—and, even if your lender says things look good, don’t open any new cards or spend oodles of money (on, say, furniture) until after you’ve moved in. After all, lenders can yank your loan up until the last minute if they suspect anything fishy, and hey, better safe than sorry.
3. You missed a medical bill
Credit cards aren’t the only debt that count with a mortgage application—unpaid medical bills matter, too. When you default on medical bills, your doctor’s office or hospital is likely to outsource it to a debt collection agency, says independent credit expert John Ulzheimer. The debt collector may then decide to notify the credit bureaus that you’re overdue on your medical payments, which would place a black mark on your credit report. That’s a red flag to mortgage lenders.
If you can pay off your medical debt in full, do it. Can’t foot the bill? Many doctors and hospitals will work with you to create a payment plan, says Gerri Detweiler, head of market education at Nav.com, which helps small-business owners manage their credit. Showing a mortgage lender that you’re working to repay the debt could strengthen your application.
4. You changed jobs
So you changed jobs recently—so what? Problem is, mortgage lenders like to see at least two years of consistent income history when approving a loan. As a result, changing jobs shortly before you apply for a mortgage can hurt your application.
Of course, you don’t always have control over your employment. For instance, if you were recently laid off by your employer, finding a new job would certainly be more important than buying a house. But if you’re gainfully employed and just considering changing jobs, you’ll want to wait until after you close on a house so that your mortgage gets approved.
5. You lied on your loan application
This one seems painfully obvious, but let’s face it—while it may be tempting to think that lenders don’t know everything about you financially, they really do their homework well! So no matter what, be honest with your lender—or there could be serious repercussions. Exaggerating or lying about your income on a mortgage application, or including any other other untruths, can be a federal offense. It’s called mortgage fraud, and it’s not something you want on your record.
Bottom line? With mortgages, honesty really is the best policy.
On the surface, rent-to-own deals can seem like a great idea. If you have shaky credit or lack sufficient financing, a rent-to-own plan can allow you to work toward homeownership.
The premise is simple: You pay monthly rent toward the purchase of the home, and at the end of the set term, you’ll own the property. Sounds perfect, right? But beware: The rent-to-own landscape can be a minefield of scams and deceptions designed to take your money—and leave you in the dust.
Common rent-to-own scams
There are several ways you can be swindled. One of the most common is scammers trying to sell property that they don’t actually own.
“People advertise a house that isn’t theirs, and pretend to be the owners and collect upfront fees from the tenant,” says Martin Orefice, the founder of renttoownlabs.com. To pull off the ruse, scammers find a vacant house that’s for rent and list it online with their own contact info.
“Then they meet the tenant at the home, pretending to be the owner, and ask for an upfront fee or nonrefundable deposit to hold the home,” Orefice says. “Once they collect the money, they disappear.” Shady, right?
Amy Hebert, a consumer education specialist at the Federal Trade Commission, says unsuspecting people can also be scammed by finding out the following:
The house is in way rougher shape than they were told (e.g., asbestos or lead is present).
Sure, legitimate rent-to-own opportunities exist—you just have to know what to look for. Here are some simple tips to help you avoid being taken by a rent-to-own scam.
Find out who really owns the property. Before turning over any money, ask for documentation showing that the person owns the house—a tax bill, for example. In many cases, the owner information is available online, so you can even check it out yourself. Before you enter into a formal contract, you should also get a title report from a title company. This will ensure that the seller owns the property and can legally sell it to you.
Know every detail of your contract. Make sure you understand every detail of any contract before signing. Many rent-to-own contracts allow for stiff penalties if the buyer is late or misses a payment, and some contracts may even become void. That means you forfeit any claim to the property and the money you’ve invested. “Consumers should review—or have an attorney review—the agreement before they sign,” says Frank Dorman of the Office of Public Affairs for the Federal Trade Commission. “It can be very difficult to extricate yourself afterward.”
Know what could be wrong with your property. Just as an attorney can help you understand contract wording, a home inspector can help shed light on any potential physical problems and health hazards in your home. Most rent-to-own agreements will include some type of contingency for a professional evaluation. Consider it money well-spent: A professional home inspector can uncover all sorts of needed repairs that are not out in the open. This can give you leverage to negotiate a better price or terms, or even just alert you to possible repairs down the road.
What to do if you suspect a scam
If you suspect someone has scammed you—or is attempting to scam you—you should immediately contact your local police department, Orefice says. You can also notify your state’s Consumer Protection Office.
When all is said and done, buying a home is exciting—and a milestone to be celebrated. But if you expect each step of the process to be a thrill ride, we’re here to tell you you’re sorely mistaken. In fact, between the rush of the hunt for the perfect place and the extreme satisfaction of crossing your threshold as a new homeowner, the rest of the home-buying process can be a bit of a slog.
There are many unglamorous parts of buying a home—some of which many consider downright boring. Do the words “financial due diligence” make your eyelids feel heavy? Yeah, ours too.
But when you know what to expect and why, it’s a whole lot easier to deal. So pay attention to these three very mundane—but very important—parts of the home-buying process. We’ve outlined why they matter and how to get through them without losing your sanity.
1. Raising your credit score
Savvy home buyers know that a good credit score will allow them to lock in a good interest rate. But what if your credit score is in the gutter? Raising it can take some time—a year, if not more—but there are some strategies you can take to get it where it needs to be.
One of the easiest and most effective ways to bump up that credit score (besides paying all your bills on time, which you already do anyway, right?) is to avoid applying for any new credit—including personal loans, car loans or leases, and credit cards—for about one year before starting the home-buying process, says Shayan Jalali, an agent with Berkshire Hathaway HomeServices, in Boston.
“Your credit gets pulled each time you apply for a loan of any type, which negatively impacts your credit score,” he says. And that can translate to a less favorable rate when it comes time to get a mortgage.
2. Securing a mortgage pre-approval
Once you’re satisfied with your credit, it’s time to shop for a mortgage lender who will ultimately help you buy a home. We won’t lie: Shopping for a mortgage lender is not fun. It requires a number of steps and a lot of paperwork.
First, you’re going to want to inquire with different lenders to learn about their rates, programs, fees, and specials. You’ll also want to consider if you want to work with a mortgage broker, who will essentially shop home loans for you.
It’s important to take the time to discuss the ins and outs of the loan programs that are available, from conventional 30-year loans to adjustable-rate mortgages, to FHA loans.
Once you’ve settled on where you want your loan to come from, it’s time to get that all-important pre-approval, which is a commitment from your lender to provide you with a home loan up to a certain amount. That will set your home-buying budget, and also show sellers that you are serious about buying when it comes time to put an offer in.
But the pre-approval process takes patience.
“Lenders require a host of documents to get you fully pre-approved, and often it comes down to minutiae such as explanations of small transactions in or out of your account,” says Luke Loiselle, a real estate agent at Keller Williams, in Portland, OR. The plus side is that once you have your pre-approval, you can largely check tedious mortgage tasks off the list.
3. Reading the fine print
Spoiler alert: You are going to be bombarded with financial, legal, and technical documents during the home-buying process—and unfortunately, it’s your job to read through all of it. Even if that sounds about as exciting as trudging through “War and Peace,” don’t skimp on the time it takes to understand the contracts you’re signing.
The best way to get through all the painful paperwork is to know what to expect. Here are the three most important documents that are going to come your way:
Your offer: Once you and your real estate agent have put together an offer, you have to look over the contract and make sure it’s accurate. In the age of digital signature technology, buyers often click to add their initials or signature without fully reading contract documents. This is especially common for buyers who have made multiple offers, as they all start to blur together. “It’s important to read every document for each offer to ensure that the contracts were completed correctly, including the offer price, earnest money deposit, and any contingencies, says Andi Costello, a real estate agent with Keller Williams Premiere Properties, in Vancouver, WA.
Inspection report: Soffits. Fascia. Ductwork. We get it, the inspection report can be a snooze. In fact, if the roof isn’t falling off and the sellers are not planning to remove that orange shag carpet, then you may decide you can just ignore the whole thing. But that would be a mistake. “Even if you’ve received a verbal update after the inspection, you should actually read the report you paid for to ensure the inspector didn’t inadvertently forget to share any areas of concern,” Costello says.
Closing documents: Get ready for a pile of closing documents about 2 inches thick. It’s in your best interest to master all the intricacies of your mortgage and understand your closing fees, so make sure to look over your closing documents and have your lender explain any issues that you’re concerned about so you know what you’re signing.