PCS Resources

What Every Military Homebuyer Should Know About Credit

2022-03-15

Before deciding on a home to purchase, you’ll want to take a close look at your credit to make sure you can qualify for a lower interest rate on your mortgage, which will save you money every month and over the life of your loan.

Why It Matters

Say you’ll put 20% down and finance a $250,000 home with a 30-year fixed-rate loan at 4%. Your estimated monthly mortgage payment (excluding property taxes and homeowners insurance) would be $1,194, and you’d pay $179,674 in interest over the life of the loan.

Using those same parameters but an interest rate of 4.50%, your mortgage payment goes to $1,267, and you’d pay $206,017 in interest over the life of the loan.

At 5%, the payment would be $1,342, and you’d pay $233,139 in interest over the life of the loan.

That’s why understanding your credit and getting a low rate are important. Nobody likes spending more than they have to, and you won’t have to if your credit is in the best standing.

Credit Basics

It’s wise to learn a few basics that can save you money before you start your home search:

1. Order your free credit report and read it.

A credit report details your credit lines like credit cards or loans and how much you owe. It also indicates to lenders if you’ve paid on time, made late payments or missed payments. Missing and late payments indicate to lenders that you may be struggling with paying your bills and you are not ready for more debt. Lenders will use this information to look at your debt-to-income (DTI) ratio, which is the total of your monthly payment obligations subtracted from your gross income. This is expressed as a percentage. Generally, you want to have a DTI of 43% or less.

By law, you can request a free copy of your credit report weekly (a change that happened at the start of the pandemic; previously it had been annually). Visit AnnualCreditReport.com or call 877-322-8228. Just note: This is your credit report only and does not include your credit score. You’ll want to make sure there are no red flags on the report. If you find an error, you can file a dispute by going to the credit bureau’s website. If you send original documentation as part of your dispute, be sure to keep copies.

2. Check your credit score.

There are several ways to get your credit score, including from a credit card company, through your bank or lender, through a non-profit credit or housing counselor, or from a credit reporting agency (you’ll probably have to pay a small fee if you go this route).

Credit scores are calculated based on the information in your credit reports. Most lenders use FICO® Scores, developed by Fair Isaac Corporation, which typically range from 300-850 points. You’ll want a score of at least 720, with higher being even better. If your score is lower, consider paying down debt and reducing credit utilization (the amount of available credit you’re using) to under 30% for each card or account.

Also understand that raising your credit score will take time and commitment as you strategically pay off outstanding debt – six months, a year, or even longer – so start well before you decide to shop for a new home.

3. Determine how much you can comfortably afford.

As a rule of thumb, you should not spend more than 30% of your gross income on housing, meaning your rent or mortgage payment. That may leave you wondering “What size home can I afford?” There are online calculators like this one to give you an estimate based on your income, debt, and how much you plan to put down.

An even better idea is to talk with a lender experienced in working with the military to get a good understanding of what type of loan would work best for you, how much you’ll need to put down, and how much you can comfortably borrow. If you end up with very little left after paying a mortgage, you may regret the purchase.

A lender can also pre-approve you for a loan up to a certain amount that can be helpful in making your offer stand out down the road.

4. Learn how to compare loan offers.

It’s important to compare offers from lenders so you can choose the one that best meets your needs. Rates and fees can vary greatly from lender to lender. Even small changes in the Annual Percentage Rate (APR), or interest rate, can mean tens of thousands of dollars in interest over the life of a loan.

5. Stay engaged.

Once your offer is accepted, an underwriter will ensure that all of the loan documents are present and accurate. During this period, they may request additional or updated documents. You’ll want to respond right away, and certainly within 48 hours, to keep the process moving.

The underwriter may approve or deny your loan, or give it a conditional approval, which means there are still a few things that need your attention. For instance, you may need to provide proof of your mortgage insurance or a letter of explanation for a recent withdrawal or deposit in your bank account.

What’s Next?

When all of the underwriting requirements are met, you’ll receive a commitment letter, indicating your loan program, loan amount, loan term, and interest rate. At that point, certain inspections and other activities will happen, including a final pull of your credit report. When the lender pulls your credit, it’s important that your credit score and revolving debt payments haven’t changed much. In other words, don’t make any large purchases that could raise your DTI or lower your credit score, including applying for a bunch of new credit cards.

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What Every Military Homebuyer Should Know About Credit

Why It Matters

Credit Basics