According to Nathan Miller, president of Rentec Direct, a software company for real estate investors, lending restrictions are extremely tight for first-time buyers. An A+ credit score is now 760 rather than 720, and in some cases, a buyer needs a score of at least 780 to get a lender’s best rate. While millennials may have passed a credit check to score a lease in a tight rental market, their credit score will now be more relevant than ever for securing a loan for a home purchase.
If a buyer has less than stellar credit, consider offering him or her these options to improve their score before speaking with a lender.
- Increase credit limits. Clients preparing to apply for a mortgage should make sure their credit card limits are increased as high as possible. Credit lines with major banks should equal between 25 percent and 35 percent of a person’s annual gross income. If a client is not at that level, suggest they call and ask for a credit increase.
- Use high-limit cards. Potential home buyers should actively use their high-limit cards so that a bank doesn’t shut them down. They should consider cycling through their credit cards, making smaller purchases, and paying off the balance on time each month. If a bank reduces a credit line or shuts down a card due to inactivity, that person’s credit score will take an immediate dive because their ratios of used credit to available credit (or debt to income) will go down.
- Pay down revolving lines. For clients who aren’t first-time home buyers and may have a home equity line of credit, Miller suggests paying it down quickly. Clients should get it below the 50 percent level so it’s not negatively impacting their credit score. Conventional loans don’t matter as much. For example, a 30-year conventional mortgage loan, regardless of the balance, will typically improve your credit score.