Good Credit is Important for Your Texas Home Loan
Maintaining a good credit score might appear difficult at first and you might wonder why it is so important. Having a good credit score is a way to tell people (primarily loan officers, banks, and even employers) that you are dependable and can be consistent in payments (or as an employee) over the long-term. Lenders want to see that the person they are lending money to will be responsible and trustworthy when paying back their loan. This is especially important when you are planning to purchase a home in Texas. So, we sat down with Alisa from Fairway Mortgage in Killeen, TX to learn more about what mortgage loan officers are looking for when they approve a home loan. This is especially important for first time home buyers in Texas.
What Mortgage Loan Officers Look For in Texas Home Buyers
Mortgage loan officers consider 3 main categories when evaluating home buyers for a home loan. Each of these categories contribute to whether you are approved for a home loan, and also the interest rate of your home loan.
1. Credit Score
According to Alisa, mortgage loan officers like to see a score of 620 or higher for most Texas home buyers. This number will vary for different mortgage companies but is a good starting point for most people. Some companies will make exceptions for credit scores as low as 580.
2. Debt-to-Income Ratio
Debt-to-Income Ratio can be a pretty straightforward concept. It is the amount of debt that you pay every month and compare it to the amount of income that you make every month. For example, if you pay $300 per month towards a car payment and $300 per month to a credit card, your debt payments per month will total $600. Then you divide that $600 by your monthly pre-tax income.
For this example, we’ll estimate your pre-tax income is $3,000 per month. Here is what the math looks like: $600 / $3,000 = 0.2 or 20%. That means that 20% of your monthly income is going towards debt repayment. Many mortgage lenders say that a good debt-to-income ratio is ideally below 45% but could be higher based on specific programs.
3. Credit History
Credit history refers to the long-term record of your debts and repayments. Your credit history is how your credit score is determined. This includes everything related to your credit including: how many accounts you have open and how long they have been open, the amount owed on each account, whether your bills have been paid on time, the number of recent credit inquiries, and more. All of these aspects of your credit will give your loan officer an idea of whether you are good at handling borrowed money.
Tips for First Time Home Buyers in Texas
There are many ways to improve your credit. The odds that you will be approved for a home loan with a good interest rate will increase as you improve your credit. Alisa has some great tips on what she suggests for home buyers in Texas.
- If you have current credit cards but your credit score is low, pay down your credit cards to 15% of their limit and keep it below 15%. That means your credit card with a limit of $1,000 should keep the balance below $150. Ideally, you will not owe anything on your credit cards, but keeping it below 15% of the limit will greatly improve your credit score and chances of being approved for a Texas home loan.
- If you have never had a credit card, consider opening a secured credit card. Secured credit cards require a refundable deposit paid upfront as collateral. The amount of the deposit is often the same as the credit limit. This ensures that you are not spending more than what you can repay and allows you to practice building credit without the risk of going into debt. Any payments that you are unable to make are covered by your deposit.
- Another way to establish credit history, at least with Fairway Mortgage, is by proving you have at least 3 non-traditional accounts that you have been paying on-time for at least 12 months or longer. Non-traditional credit accounts might include rental payments, utility payments, school tuition, renter’s or auto insurance, and many more.
You CAN become a homeowner. It is not just a pipe dream. NextHome Tropicana is here to help you find your new home and work with you to prepare for the process. Maintaining a good credit score is essential to getting approved for a home loan and getting the best possible rate. If you have any questions or want to start the conversation about your future home sweet home, please call us at (254) 535-0277.