Mortgage  Question?
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If You Lack Credit History Apply Mortgage or Wait?

If you have a low credit score due to a lack of credit history should you apply for a mortgage now or wait? I only have two credit scores because I only recently opened a credit card account and I am trying to decide what two do.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

As long as your credit score is at least 620 you are positioned to qualify for a conventional mortgage today because you have at least two credit scores.  A conventional mortgage is a standard mortgage provided through traditional lenders such as banks, mortgage brokers and credit unions. The loan terms for a conventional mortgage are usually better than for a government-backed mortgage such as an FHA loan if you make at least a 20% down payment.  If your score is below 620 then you should consider an FHA mortgage, which permits borrower credit scores as low as 500 if you make a down payment of at least 10% of the property purchase price.  The minimum credit score required for an FHA loan is 580 if you make a down payment between 3.5% and 10%.  So in short, you do not need to wait to apply for a mortgage and you may be able to get approved for a conventional loan, depending on your credit score and other factors.

The drawback to applying for a mortgage now is that your relatively low credit score -- due to your lack of credit history rather than credit problems -- means that you will likely pay a higher mortgage rate. A higher mortgage rate means you pay a higher monthly loan payment. In your case, because you have two credit scores, the lender uses the lower score to determine your mortgage rate as well as what size loan you can afford. You may want to contact the credit bureau that does not provide a score for you and ask about establishing your credit profile so that you have three scores.  For borrowers with three scores, lenders usually use your middle credit score, which may be helpful if one of your scores is significantly lower than the others. We also provide a comprehensive overview of the credit score required for a mortgage on FREEandCLEAR.

Your other option is to wait several months until you have developed your credit history and your scores improve over time, assuming you pay your bills when due and keep your credit usage relatively low as a compared to your borrowing capacity. If your credit score increases, you may be able to qualify for a lower mortgage rate which reduces your monthly payment and saves you money. If you decide to wait, I also recommend that you get another credit card with a relatively low borrowing limit but not use the card. Sometimes having at least two loan accounts, such as credit cards, can boost your credit score even if you do not use one of the cards. This is because you have further established your credit history plus you have access to additional borrower capacity if needed.

So your financing alternatives are to apply for the mortgage now and potentially pay a higher mortgage rate or wait to apply and potentially benefit from an improved credit score. The negatives of waiting are that there is no guaranty that your credit score will increase or how long it will take for your score to change. Waiting also exposes you to the risk that mortgage rates increase over the next several months, which is out of your control. So even if you wait and your score improves, mortgage rates could increase due to market conditions and you end up in the same place you would be if you applied for the loan now.

One option is to apply for the mortgage today and buy the home you want. If your credit score improves in the future you could potentially refinance your mortgage at a lower interest rate if you wait at least a year after your loan closes. It is important to reiterate that no one really knows where interest rates will be in a year but this is one possible scenario available to you.

Additionally, if you have sufficient funds saved, I recommend that you make a down payment of 20% which allows you to avoid paying private mortgage insurance (PMI) plus putting 20% down usually enables you to qualify for better mortgage terms. For example, if you buy a home for $250,000, you could make a $50,000 down payment, which is 20% of the purchase price, and get a mortgage for $200,000. You can use any remaining funds to pay for closing costs or property renovations plus it is always a good idea to keep savings in reserve as financial buffer.

My preliminary advice is that you apply for the mortgage now but I recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area on the table below. We advise you to contact at least five lenders as qualification guidelines vary and some lenders stricter credit score requirements. 

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Current Mortgage Rates as of July 20, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

You can also use our Free Personalized Mortgage Quote function to receive no obligation mortgage quotes from up to four lenders.

Finally, if you are new to the mortgage process you should review our Mortgage Cheat Sheet which addresses key mortgage topics from loan application through closing.

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%
Current Mortgage Rates as of July 20, 2019
  • Lender
  • APR
  • Loan Type
  • Rate
  • Payment
  • Fees
  • Contact
View All Lenders

%

Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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