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Many first-time home buyers feel at a loss when it comes to working on their credit. Don’t apply for your first credit card and your first home loan in the same year. A lender will be looking at your credit habits for at least the 12 months leading up to your credit application.

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FHA.com is a privately owned website, is not a government agency, and does not make loans.

Building Credit Ahead of a Home Loan Application

June 2, 2021

Building Credit Ahead of a Home Loan Application
Many first-time home buyers feel at a loss when it comes to working on their credit. Some fly-by-night credit “repair” agencies (remember, not all are disreputable) take full advantage of this to hawk their wares. But what does a newcomer to credit and house hunting do to give themselves the best shot at FHA home loan approval?

For many it starts with applying for smaller credit first--often in the form of a store credit card such as those offered by The Gap, Old Navy, etc. But there are pitfalls to avoid when doing so.

Building and Maintaining Credit Ahead of a Home Loan Application

The first thing you need to know about building your credit (or repairing it) is that it takes TIME. Don’t apply for your first credit card and your first home loan in the same year. Borrowers should know that a lender will be looking at your credit habits for at least the 12 months leading up to your credit application in general (to see if you have late or missed payments and other issues) but also a longer period of time to establish you as a good credit risk.

Applying for store credit and using it to build your credit history can be a good idea IF you remember a few important things along the way.

What You Need to Know About Credit

If you apply for a store credit card, there is a hard inquiry into your credit, which can lower your FICO score for a while. That is one reason why you should not apply for other credit at the same time you apply for a home loan. You can use a store credit card to build credit that could lead to a successful credit card application (which will also result in a hard inquiry into your credit).

The key to SUCCESSFULLY using a store credit card to build or rebuild credit? Knowing that store credit cards have low credit limits AND understanding that the amount of that limit you use needs to be well below 50% of the limit in order to maintain a good credit score. In other words, the Old Navy card you take out can help you build credit as long as you don’t use much of your credit limit and pay on time, EVERY SINGLE TIME.

Credit Card Balances Are Important

Don’t use too much of your credit limit on any card and never be late on a payment. Those are the rules you need to strictly observe in order to get closer to being creditworthy enough to be approved for a home loan. Don’t go above 50% of your limit on any card. 30% is ideal. Why all this fuss about the limit?

Credit utilization is something your lender pays attention to--the percentages we discuss here are definitely on your loan officer’s mind when it comes to approving your mortgage loan.
Does all this sound a bit complex and time consuming? So is a home loan. But the effort is definitely worth it as you won’t just improve your chances at home loan approval but also your chances at future credit approval for auto loans, more aspirational credit cards, etc.

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Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.

Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing

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