How Much Credit Do I Need as a First Time Home Buyer?
6 minute read
·
June 1, 2022

Share

If you’re a first-time homebuyer, credit score and mortgages are probably high on your “things to consider” list. 

Unless you plan to purchase your home with cash, you’ll need to arrange for financing, which means a mortgage loan. 

Your credit score not only directly impacts what interest rate you’re eligible for but also your overall loan eligibility. 

Credit scores also affect your ability to refinance both government and conventional loans. 

Read on to find out how to prepare your credit for homeownership.

A great place to start

  • Get a free credit report from one of the credit bureaus (or through the Federal Trade Commission website)
  • Find out your credit score and the credit score requirements
  • Find the different loan programs available to first-time homebuyers 

What credit score is needed to buy a house?

While requirements often vary depending on the lender or program, generally, the minimum credit score for a first-time homebuyer to get a conventional loan is 620. 

But that doesn’t mean you can’t qualify for a mortgage with a lower credit score.

Borrowers with lower credit scores, shorter credit history, bad credit, or less than perfect credit can still qualify for a loan. 

Programs such as FHA loans , VA loans, or USDA loans offer more relaxed credit requirements, including a lower credit score.

FHA loan: 500 minimum credit score

FHA loans are popular choices for first-time homebuyers. 

Because the U.S. government backs these mortgages, lenders have less risk, which translates into mortgages with requirements that many borrowers find easier to meet.

FHA loans require current homeowners (those looking to refinance or purchase a new home) and first-time homebuyer credit scores to be at least 500. 

If borrowers want to take advantage of the 3.5% minimum down payment option, they’ll need a credit score of at least 580. 

However, it’s important to note that the FHA doesn’t issue the loans directly—they are issued through FHA-approved lenders, like Assist Home Loans. 

Some lenders can require a higher credit score, usually between 620 to 640, to qualify for an FHA loan through their office.

Conventional loan: 620 minimum credit score

Buyers seeking conventional loans are recommended to have credit scores between 620 and 640 to qualify. 

Borrowers with credit scores above 760 can often qualify for the best mortgage rates available.

VA loan: 620 minimum credit score

Eligible service members, veterans, or surviving spouses can apply for VA home loans. 

Borrowers interested in VA loans will have to provide a Certificate of Eligibility (COE), showing they meet VA eligibility requirements. 

COEs are available from the VA, and borrowers can also calculate their VA home loan benefit amount at the same time.

The VA doesn’t have a preset minimum credit score requirement for borrowers. However, because lender requirements can vary—many lenders ask that VA loan or refinance applicants have a credit score of 620, while others will accept credit scores starting at 580. 

It’s worth checking with the specific lender you’re interested in partnering with for the most accurate information.

Jumbo loan: 700 minimum credit score

Borrowers interested in applying for a jumbo loan typically need a minimum credit score of 700 for loans up to a million dollars. Expect higher credit score requirements for loans above that amount.

USDA loan: 640 minimum credit score

Buyers considering purchasing a home in an approved rural area can apply for a USDA loan. 

The USDA doesn’t have a preset minimum credit score like VA loans. 

However, lenders generally look for credit scores of at least 640 to qualify.

Credit score, credit history, and credit report—what’s the difference?

Your credit history is an overall record of your payments and debts. 

Your credit report provides a detailed inventory of your payment and credit history but doesn’t include your credit score number. The information included in your credit report comes from all three reporting agencies and can run several pages.

Lenders use your credit score number—based on your credit history and credit report— to evaluate your risk as a borrower. 

Fair Isaac Corporation, called “FICO score,” is the most common credit score number used, but VantageScore—a collaboration of the three main credit reporting bureaus TransUnion, Equifax, and Experian—can also be used.

What factors affect a credit score?

Your credit score number is based on multiple factors. These factors include your credit history, whether you pay your bills on time, how much debt you’re carrying, how long you’ve had credit, new credit, the type of credit (i.e., credit cards, student loans, among other factors). 

However, your payment history dramatically impacts your credit score more than anything else—it is the single most important factor used for calculating credit scores.

How can I improve my credit score?

In addition to using your credit carefully, you can improve your credit score in several ways

  • Always make bill payments on or before the due date.
  • If you can’t pay off a debt in full, make the minimum payment. Paying even a little above the minimum amount can help your credit score improve faster.
  • Never skip or miss payments—even if there’s a dispute about the amount owing.

What mortgage lenders look for when approving a home loan?

Lenders consider more than just an applicant’s credit score or credit history when it comes to approving mortgage applications.

Having a good credit score helps when it comes to mortgages. 

It can help you get lower interest rates but it isn’t enough to be approved for a mortgage. In addition to your credit score, mortgage lenders typically look at the following areas:

  • Your income and employment history.
  • How much money you’ve saved for your down payment.
  • Tax returns for the immediate two years preceding your mortgage loan application.
  • Do you have any money in savings or investment accounts?
  • What is your debt-to-income ratio (DTI)? Your DTI looks at your current debt compared to your current monthly income. In other words, DTI asks the question: how much of your monthly income do you spend paying off debt?

Get in touch with Assist Home Loans to guide you through your pre-approval process

If you’re a first-time homebuyer and have questions about whether you qualify for a conventional loan or government-backed home loan, reach out to the home loan specialists at Assist Home Loans today.

Our experienced professionals are here to help you take the first step toward an important investment.

Share


More on First Time Home Buyer