Buying a Maryland Home in 2025-Credit

Understanding credit is essential for first-time homebuyers, as it significantly influences your ability to secure a mortgage and the terms you'll receive, not only on a home, but on all other lines of credit as well. Let's break down the basics of credit to help you on your home-buying journey.

What Is Credit?

Credit is an agreement where a lender allows you to borrow money with the promise that you'll repay it later, usually with interest. Your credit history records how you've managed borrowed money, including credit cards, loans, and other debts.

What Is a Credit Score?

A credit score is a three-digit number that reflects your creditworthiness, or how likely you are to repay borrowed money. Scores typically range from 300 to 850; higher scores indicate better credit. Lenders use your credit score to decide whether to approve your mortgage application and to determine the interest rate. Consumer scores that you get from your credit card or credit aggregators like credit karma can vary greatly from the mortgage score. Typically your consumer score will look higher than what a lender will see when reviewing your scores. A different algorithm (calculation) is used to determine your mortgage score than consumer scores.

Why Does Credit Matter for Homebuyers?

Your credit score affects:

• Mortgage Approval: Lenders assess your credit to determine if you qualify for a loan.

• Interest Rates: Better credit scores often lead to lower interest rates, saving you money over time.

• Loan Terms: A strong credit history can provide more favorable loan conditions., lower costs and fees.  It may also allow you to qualify for programs that you wouldn't qualify for with lower scores.

• Minimum Credit Score Requirements

Different loan types have varying credit score requirements:

• Conventional Loans: Typically require a minimum credit score of 620.

• FHA Loans: May accept scores as low as 580 with a 3.5% down payment; some lenders might consider lower scores with a higher down payment.

• VA Loans: Often have more lenient credit requirements for eligible veterans and service members.

• USDA Loans: Don't actually have a minimum credit score for the program, but most lenders will require at least a 640 score.
• Downpayment and closing cost assistance programs with the Maryland Mortgage Program require a minimum of a 640 score, other programs may have higher or lower score requirements.

How to Check Your Credit

You can obtain a free credit report annually from each of the three major credit bureaus: Experian, Equifax, and TransUnion, through AnnualCreditReport.com. Reviewing your report helps you understand your credit standing and identify areas for improvement.

How To Cut Down On Unsolicited Offers For Credit:  Check out the post on the optout prescreen service.  In my opinion, this should be utilized by every consumer.  Opting out can add a few points on your score and cut down on what can be a onslaught of calls from lending companies that have purchased your information from the credit bureaus (called trigger leads) once your credit is pulled by a lender. 

Tips to Improve Your Credit

• Pay Bills on Time, EVERY Time: Consistent, timely payments boost your credit score.  Even one payment 30 days after your due date on one credit account can drop your score significantly.

• Reduce Debt: Lowering your credit card balances can improve your credit utilization ratio.  Having debt to available credit of between 1 and 10% of your credit limit is best for scoring purposes.  Having high balances or spending over your credit limit also can have a big impact on your score.

Avoid New Credit Applications: Multiple credit inquiries can negatively impact your score.  Many people worry about the inquiries the most when applying for credit.  Inquiries only have a 10% impact on your scores. see graphic from  myfico.com

• Correct Errors: Review your credit report for inaccuracies and dispute any errors you find.  Studies show that there are mistakes on up to 75% of credit reports! 

Understanding and managing your credit are really important steps toward purchasing your first home. By maintaining good credit habits, you enhance your chances of securing favorable mortgage terms, bringing you closer to owning your dream home. 

Be sure to speak with a knowledgable lender to discuss your scores and things you may be able to do to improve your scores. Sometimes even a few points can make a difference in your costs. 

IMPORTANT:: Be aware that the farther you get away from negative credit  events (like a collection or late payment) the less impact on your score.  Paying off an old collection can actually lower your score because that account is then brought "current", increasing the impact, even when a zero balance.