Housing Services Resources

Buying a Home...1, 2, 3: Understanding Credit

Understanding your credit is important in preparing for homeownership. This page explains what credit is and why having good credit is so important, especially when you want to buy a home.

It’s true that you need good credit to buy a home, but you don’t need perfect credit.

If you don’t have good credit right now, don’t get discouraged—you can start improving your credit.

It may take some time, but you will be far better off if you improve your credit before you apply for a home mortgage loan or other large purchase. This is important because if you have a habit of not paying your bills on time, or have a lot of debt, you may not qualify for a mortgage loan. Or the lender may give you a loan, but with a larger down payment requirement or at a higher rate of interest. If you pay a higher rate, you could end up paying thousands of dollars more in interest for your home.

Also, remember that the lender, not a credit score, makes the final decision to approve a mortgage loan application. A credit score is simply a tool used by the lender. The lender may take into consideration any special reasons for your past credit problems. In addition, the lender will look at more than just your credit score—such as your equity investment in the home, job history, income, savings, and the type of mortgage loan you want—before making a final decision.

Learn much more about managing and improving your credit in our Knowing Your Credit Worthiness document. (PDF, 132 kb) Fannie Mae has a very useful document, Knowing and Understanding Your Credit. (PDF, 2.11 MB)

Credit means you are using someone else’s money to pay for things. It also means you are making a promise to repay the money (the loan) to the person or company that loaned you the money (the creditor or lender). A loan usually includes both principal (the amount of money you borrowed) and interest (the additional dollars you pay for the privilege of borrowing the money).

How do I know if I have good credit? Good credit means that you make your loan payments on time and you repay your debts as promised. Good credit is important because it makes it more likely that you can get a new loan in the future when you want to make a major purchase, such as a car or a home. When you have a good credit record, lenders feel more confident that you will be willing and able to pay back the new loan.

Sometimes people think they have good credit. Then they apply for a loan and are surprised to learn that there are some problems with their credit. The best way to find out if you have good credit is to get a copy of your credit report. (It’s a good idea to order your credit report once a year to make sure there are no errors on it).

How do I order a credit report?

You can order your credit report from any of the major credit reporting agencies:

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