Millennial Home Buyers: How to Improve Your Credit and Qualify for a Mortgage
As we learned in our profile of millennial homebuyers, most are burdened with student loans and are relatively new to earning a steady paycheck while a significant portion don’t have any credit to speak of. Let’s look at first-time homebuyer loans and what you can do to quickly improve your credit to qualify for a mortgage.
First-Time Homebuyers Loans
Because these loans are designed to encourage people with moderate incomes to venture into the real estate market, they come with a few restrictions. It’s helpful to know about these before you start house-hunting. Most first-time buyer loans
- Cap the price of the house you can buy (so you’re not biting off more than you can chew)
- Require you to live in the house (so don’t plan on renting and staying with your parents)
- Have long-term benefits built in to encourage you to stay longer (which you lose if you sell within the first five to ten years)
- Have a longer overall term (they’re often locked to 30 years or so)
- Come with stricter requirements from home insurance companies (so a real fixer-upper may be out of the question)
But one of the biggest concerns for millennials is usually having good enough credit to qualify for a mortgage in the first place. Here’s how you can improve your credit quickly, to qualify for that cute little starter home.
These tips should become habits that you don’t even think about. Pay all your bills (not just your credit card bills) on time. If you’re behind on any account, get it caught up and keep it caught up. Keep your credit card balance low and always pay the minimum amount on time (if you can’t pay it off). Don’t open new cards or close old ones that you’re not using – this doesn’t often have a positive impact on your score.
There are a few ways to start improving your credit score quickly, but I recommend trying them one at a time, as not all of them will work for every situation.
- Pay more often. Credit cards report balances once a month (on your statement date) to the credit bureau. If you’re only paying the card down once a month, the credit bureau sees higher numbers. If you pay halfway through the month and then again at the minimum payment date, the carried balance reported to the credit bureau is lower.
- Ask for a credit limit increase. If your credit limit is $2000 and you max your card out every month, you’re showing a 100% utilization rate. And utilization rates factor into about 35% of your credit score. If your credit card lifts your limit to $4000, you automatically cut your utilization rate in half.
- Take out a dummy loan. This is great if you don’t have any credit score or are new to earning credit. Apply for a small cash loan at your bank or credit union, put the loan amount in savings, and pay diligently on it once a month when they send your statement. This creates a paper trail of timely payments that will help set your credit in the right direction.
Unfortunately, improving your credit can be a long, slow path. But it’s worth it to start off on the best foot possible, especially if you’re hoping to buy a home, a car, or any other significant item.