What first-time buyers need to know about credit scores and financing home purchase

As featured in The Washington Post

I just watched one of your videos on YouTube. I have a few questions about the process of buying a home.

My girlfriend and I are currently saving up and building our credit scores. We started this journey back in February and have been saving $2,000 a month. We have currently saved $16,000 and have the money in a joint savings account.

Her credit score is now 760 and mine is around 700. However, it was around 480 back in February. I did a lot of disputing and fixed a few errors. She authorized me on her oldest card, which helped me get my own cards.

Is it possible for us to purchase a home by September? Should I be doing anything else? We haven’t been preapproved, but we’re looking at homes in a price range of between $150,000 and $170,000. I believe we will have more than the 20 percent to put down to avoid paying FHA and loan insurance fees. Real estate taxes should be around $3,000 a year. We bring home exactly $3,200 and have about $600 in rent, food and gas expenses. We don’t have any real debt.

We live in New York but want to move closer to my mother’s house, which is about two hours away, in Pennsylvania. Can we still get a mortgage from another state? Or will lenders think that’s too far from our employment?

Thanks for your questions, and for being so thoughtful about the home-buying process. We think your letter will thrill many real estate agents who are wondering whether there are young first-time buyers thinking about jumping off the fence and making a move.

We think you should pick up a copy of Ilyce’s book, “100 Questions Every First-time Home Buyer Should Ask.” You can also buy a used third edition for a few bucks or find it in your local library. Your questions about debt are important — you and your girlfriend should understand how the process works.

Let’s talk about credit. When you put down 20 percent in cash on a home, you avoid PMI (which is actually private mortgage insurance). That’s good, because PMI is expensive. But credit scores usually don’t rebound 300 points in six or eight months, even if you fix the errors. We’re a bit concerned that the disputed items could come back to haunt you. But maybe not. In any case, a lender will take both of your credit scores and find a middle ground, so potentially 730 or 725. That’s pretty good, but not 760, and 760 or even 780 is the threshold for great credit (on the FICO scale of 250 to 850, which is what most lenders use) these days, depending on the lender.

Lenders will have a hard time believing that you’re going to drive two hours each way to a job, no matter how you try to convince them, so they may want to treat the purchase as a vacation home, not your primary residence. That could impact the loan program (including the interest rate and other terms) you qualify for.

We’re going to guess that if you’re bringing home $3,200, your gross is about $5,000 together, or $60,000 per year. We think you might just qualify for a $150,000 to $170,000 loan, but it’s at the high end, especially if you have other debt. But assuming you do, there are myriad other home-related expenses that can swamp you if you’re not ready.

Given the amount of money you are saving each month, you’re clearly doing a great job saving and we like that you have a hands-on approach to improving your financial situation. We’d suggest you sit down with a mortgage lender or mortgage broker and go through your finances, to get a third-party assessment of your chances of getting approved for the loan you want.

The mortgage lender or mortgage broker doesn’t need to pull a copy of your credit score, if you bring a copy of your credit history from AnnualCreditReport.com(choose one report from any of the three big three credit bureaus); you can also get a copy of your credit score for less than $10. With that information, the lender should be able to give you some options and advice on your loan and your plans. Again, you don’t need to apply for the loan they’re offering at that point, because you’re simply gathering information. You can apply down the line once you’ve researched four or five different lenders.

Once you have done your homework and have added everything up, you sign the paperwork. Again, you need a bit more help than we can give you here, but check out www.ThinkGlink.com for free information on buying, selling, fixing up and financing your new house. You’ll also find hundreds of stories on improving your credit score and credit history that might help push yours over the 760 or 780 threshold in time.

Good luck! We think you’ll get where you want to go in 2017.

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