Q: I’m a graduate student who will be graduating in May. At that time, I’ll be starting a full time job, and looking to purchase a home for the first time.
Because of some really stupid choices with credit cards in college, my credit score is pretty low. I’m working hard to pay off all of my debts, but this may take some time. I also have lots of student loans on my report.
I’m a little concerned about qualifying for a home loan. Will I automatically be turned down because of my poor credit history, or will I be stuck with a high-interest loan?
A: Congratulations on your graduation. However, this isn’t the best time to be looking for a house if you have poor credit and no money for a down payment. These days, lenders want buyers to put down at least 3 percent of the purchase price as a down payment, plus have at least a month’s worth of expenses in reserve. You’ll also need cash for some of the closing costs. Many lenders want to see borrowers put down at least 5 percent to buy a home.
Will you be automatically turned down because of poor credit? It depends on how bad your credit score actually is at the moment. If your credit score is below 625, you might have a very difficult time getting any sort of loan.
Even if you are approved, your credit score means that you’ll be paying a much higher interest rate than someone with a good credit history and score. How much more? According to the numbers provided by MyFico.com at the end of March 2008, if your credit score is 760 to 850 (the top tier), you’ll pay 5.682 percent on a 30-year, $300,000 loan. But if your credit score is 500 to 579 (the bottom tier quoted), you’d pay 10.242 percent for the same loan, or nearly an extra $1,000 per month for the same loan.
As a graduate student with plenty of debt, student loans and a poor credit history, I think your best bet is to focus on improving your credit score and paying down your outstanding loans. Housing prices will still be low in a year, but you’ll be in a much better position to take on that kind of debt.