Homebuying Articles The Importance of a Credit Score for First-time Homebuyers

The Importance of a Credit Score for First-time Homebuyers

couple on sofa looking over finances

Many Americans have a basic understanding of credit, but what makes it “good” or “bad”? How can that affect buying your first home? Credit can seem like a complex and daunting obstacle, but Lennar and our affiliate lender Lennar Mortgage are here to help. This article will break down what credit is, the factors that determine it, how it affects buying your first home and ways to improve your credit.

What is credit

In short, it is your reputation as a borrower. It’s a standardized way to express your history of managing your debt and making on-time payments. Your credit score is a number that represents your reliability to repay past debts. Here is a common range for the score:

  • Excellent – 800-850
  • Very Good – 740-799
  • Good – 670-739
  • Fair – 580-669
  • Poor – 300-579

You can find this number by checking your credit report, which is created by the three major credit reporting agencies that gather your history and report your credit score. These bureaus are Equifax, Experian and TransUnion. They create a master document – a credit report – that includes open and closed accounts, account balances, credit limits, hard inquiries into your credit and your payment history.

So how does all of this affect your day-to-day life? The better your credit is, the more financial opportunities you may have to choose from. A higher score means you are more likely to be approved. This can also mean more favorable loan terms and higher incentive credit cards.

Five factors determine your credit score

The most widely used way to establish your credit score is the FICO® Score, ranging from 300 to 850 as shown above. These are the five most common factors that determine this score:

1. 35% payment history

This is your history of paying your credit accounts on time. Avoid making payments late to keep your credit score healthy.

2. 30% amounts owed

This is the total amount of debt that you owe. On top of paying down your loans over time, aim to use a low percentage of available credit.

3. 15% length of credit history

How long you’ve had a history of managing debt also matters. A longer history can lead to a higher score.

4. 10% credit mix

Having both revolving credit (like a credit card) and installment loans is beneficial to your score.

5. 10% new credit

Multiple hard inquiries at once can lower your score. Avoid making major purchases around the same time.

How credit affects buying a home

If you’re looking to buying your first home, paying special attention to your credit can go a long way. The credit score is a primary metric a lender will use to determine if you qualify for a mortgage. If you do quality, it will also influence the terms of the loan.

There are several benefits associated with a higher credit score when deciding on a mortgage. You can qualify for more loan products, giving you the flexibility to choose what works best for you. You can have access to more down payment assistance options. You can also receive lower interest rates on your mortgage.

A lower score means the lender is taking on a bigger risk by lending to you. If approved, borrowers with a lower credit score can expect to pay higher interest rates.

It may take a while to improve your score, so plan ahead. It’s a good idea to take these steps before you begin looking for your first home:

  • Request a credit report from the three bureaus.
  • Review your report for inaccuracies and areas of improvement.
  • Avoid opening new lines of credit or making major purchases (like buying a car) during the mortgage process.
  • Shop around for the best mortgage. All inquiries from mortgage companies within 30 days will count as just one hard inquiry on your credit report.
handing over the keys to your new house

How to improve your credit score

Now you know the importance of the credit score, it’s time to take what you’ve learned and improve or maintain that number.

1. Make payments on time

Payment history is responsible for the largest percentage of your credit score. Late payments can stick around for up to 7 years. For ease of mind, set up auto-payments for bills to avoid missing by mistake.

2. Open a credit card

This adds to the mix of accounts listed on your credit report. Make sure not to spend more than you can pay back.

3. Improve your credit utilization

This is the ratio of your outstanding balance to overall available credit. Even if you pay off your balance in full each month, aim to use less than 30% of your limit before making a payment. To lower utilization, you can decrease your use of the card or increase your limit.

4. Resolve any inaccuracies

Errors that can bring down your score may include activity you do not recognize or that isn’t in your name, payments incorrectly reported as late or negative info that is too old to be included in the report.

5. Keep it up!

Every on-time payment builds your reputation as a reliable borrower.

As part of our mission to create the world’s simplest path to homeownership, we’re pleased to provide complimentary credit education through our affiliate Lennar Mortgage’s HomeBuyer Solutions Group. This program can pair customers with a Credit Specialist to bring them closer to securing their dream home.*

*Lennar Mortgage’s Home Buyer Solutions Group (HBSG) is a voluntary program and participation is not required in order to obtain a loan from Lennar Mortgage and/or purchase a home from Lennar Corporation or any of its affiliated homebuilders. Participants enrolling in HBSG are under no obligation to purchase a Lennar home or obtain a mortgage loan from Lennar Mortgage. Participation in or completion of the HBSG program does not (a) constitute a loan approval or indicate that the participant has or will qualify for a loan from Lennar Mortgage or any other lender; (b) guarantee the participant will qualify to purchase a Lennar home; or (c) guarantee any improvement of the participant’s credit rating or history. Upon enrollment, the participant must provide pertinent financial information and must authorize HBSG authority to obtain and analyze the participant’s credit report. Completion of the HBSG program averages 90 to 120 days from the day of entry in the program to completion. Financing is available through seller’s affiliate Lennar Mortgage, but use of Lennar Mortgage is not required to purchase a home (See Affiliated Business Arrangement Disclosure https://www.lennar.com/api/images/images/com/files/AdABAD.pdf). Lennar Mortgage, LLC – NMLS # 1058. 

Lennar makes no guarantee of present or future market conditions. Forecasts, projections and other predictive statements should never be relied upon. You should consult your own accounting, legal and tax advisors to evaluate the risks, consequences and suitability of any real estate transaction. This is not an offer in states where prior registration is required. Void where prohibited by law. Copyright © 2024 Lennar Corporation and Lennar Mortgage, LLC. All rights reserved. Lennar, the Lennar logo, Lennar Mortgage and the Lennar Mortgage logo are U.S. registered service marks or service marks of Lennar Corporation and/or its subsidiaries. Arizona – Lennar Sales Corp.; HSP Arizona, Inc. ROC 242267B-2; ROC 138431B; ROC 144869A; Lennar Arizona Construction, Inc. ROC 228129B; Lennar Arizona, Inc. d/b/a Lennar Homes ROC 232731B; Lennar Communities Development, Inc. ROC 137295KA / California – CalAtlantic Group, Inc. (Responsible Broker: Joanna Duke) #02058246; BMR Construction, Inc. 830955; Lennar Sales Corp. (Responsible Broker: Joanna Duke) #01252753; CalAtlantic Group, Inc. 1037780;; Lennar Communities, Inc. 66241; Lennar Homes of California, Inc. 728102 / Florida – Lennar Realty, Inc.; Lennar Homes, LLC CBC038894; CGC062343, CGC1518166, CBC1257529, CGC1523282, CBC1260831, CGC1526578, CBC051237; Standard Pacific of Florida GP, Inc. CGC1506052, CGC1517342; U.S. Home Corporation CGC1518911; WCI Communities, LLC CGC031523 / Maryland – CalAtlantic Group, Inc. MHBR No. 128; U.S. Home Corporation MHBR No. 316 / Minnesota – Lennar Sales Corp.; CalAtlantic Group, Inc. BC736565; BC700385; U.S. Home Corporation BC001413 / Nevada – Lennar Sales Corp.; Greystone Nevada, LLC 48844; Ryland Homes Nevada, LLC; Lennar Reno, LLC 64226; Ryland Homes Nevada, LLC 56652 / New Jersey – Lennar Sales Corp. / North Carolina – Lennar Sales Corp. / Oregon – Lennar Sales Corp. #201206464; Lennar Northwest, Inc. CCB #195307 / Pennsylvania – Lennar Sales Corp. / South Carolina – Lennar Carolinas, LLC / Tennessee – Lennar Sales Corp. ph. 615-465-4328 / Utah – Lennar Homes of Utah, Inc. / Washington – Lennar Sales Corp.; CalAtlantic Homes of Washington, Inc. CALATHW836LR; Lennar Northwest, Inc.LENNAN1893QG / West Virginia – US Home Corporation d/b/a Lennar; #WV060106. Date 03/24


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