Should We Get Pre-Approved Now or Wait for Credit Scores to Go Up?

Reader Question: "My husband and I are looking to buy a house this year. We are first time home buyers. My fico score is 740 and my husband's is 660. We recently paid off all of our revolving debt, but most of it has not shown up on our credit report yet. Should we wait a month or two to get pre-approved, or could we get pre-approved now, in hopes that our current credit scores will be good enough to get a decent rate. we will be applying for an FHA loan. If you have any advice, we would greatly appreciate it. Thank you."

If I were you, I would talk to a lender and ask them this same question. Make it clear to them that you know where you stand, in terms of your credit scores. I would try to handle this over the phone, without letting them pull your credit. In other words, try to get some insight before you sit down at the table for a pre-approval review.

With an FHA loan, you'll probably get a better rate than you would get on a non-FHA loan, with your current score. If you both boosted your scores above 750, you would probably get the best rates the lender has to offer. The question is, how long would that take? It's a choice between waiting for a higher credit score or getting into a home sooner (perhaps to take advantage of rock-bottom pricing).

Reducing your debt (especially your credit card debt) is definitely a great way to elevate your scores. Your credit utilization ratio accounts for about 30% of your FICO score. So when you use less of your available credit limit, your score goes up. This should happen fairly quickly, often with a month to 45 days. So if you're not hard pressed to buy right away, it might behoove you to wait a month or so to see if your score improves. Here's an article I did recently to show how much of a difference this can make in a monthly payment.

Hopefully you have at least 3.5% to put down on your FHA loan. That's the requirement these days. This is where many first-time home buyers are getting stuck right now. Without FHA backing, the down payment is even higher -- up to 20% of the loan amount. But with an FHA home loan, you'll probably need to pay 3.5% out of pocket. Just wanted to touch on that, in case you didn't already know.

Lastly, you should keep an eye on which way your local housing market is going. If your market has already hit bottom and is on its way up, then it would make sense to buy sooner rather than later. If your market is on a stable "flat line" at the moment, then you'll have more time to boost your credit scores. Remember, if you save a little money with a better rate but end up paying more for the home (because of pricing increases) ... then you come about the same as you would if you had bought earlier. It's a trade-off.

In closing, I would advise you to speak with a lender about your situation. Tell them the following things: (A) you are pursuing an FHA loan, (B) you already know what your FICO scores are, (C) you recently made some changes that will likely improve your FICO scores, and (D) you want to know if you should get pre-approved now or wait a little while to see what your scores do. A pre-approval is not set in stone, and most of them are only valid for 30 to 60 days. So they may recommend that you come in now to get pre-approved, and then revisit your qualifications later on.

I hope that gives you some things to think about. Good luck.

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