Buying a home is one of the biggest investments you’ll make in your life. Not only will you likely live in the same house for many years and possibly pass it on to your heirs, but homes are also expensive. Some home values get close to $1 million, and not everyone has enough cash in their bank accounts to fund those purchases. That’s why most homeowners turn to mortgage lenders to secure financing when the time is right. Of course, some lenders have better terms and interest rates than others, but shopping around will help you find a great deal for your home loan.
However, lenders don’t work with everyone. Financial institutions incur some risk with every loan they give. These institutions generate profits if borrowers stay on top of payments, but some borrowers fall behind on payments. While a borrower’s default allows the bank to obtain the property, this isn’t always profitable for them. So, banks look at your credit score and financial health to assess if you can take on the loan. Having a good credit score and a low debt-to-income ratio (DTI) can help you secure more capital and a lower interest rate.
If this is your first home purchase, you may not be familiar with credit score requirements. This guide will bring you up to speed so you’ll know what to expect when applying for a mortgage to get your first home.
Understanding Your Credit Score and Mortgages
Lenders want reassurance that you can afford to make timely mortgage payments. So, they check out your finances, including your employment history, earnings and assets, when you apply. They also want to know that you’ve responsibly managed debt obligations in the past, which is where your credit score comes in.
Why are Credit Scores Important for First-Time Home Buyers?
Credit scores matter for first-time home buyers because they significantly influence your approval odds. They also play a role in the type of loan you’ll qualify for and the terms you’ll receive.
The Role of Credit Scores in Securing a Home Loan
This three-digit number paints a picture of how you manage the funds you borrow. The FICO score is used by over 90 percent of creditors and lenders to make lending decisions. It ranges from 300 to 850. A higher credit score increases the likelihood of getting approved, gives you more choices, and can help you secure a lower interest rate.
Most mortgage lenders assess applicants based on their FICO Scores. They get this score from the three major credit bureaus – Experian, TransUnion and Equifax – and use it when deciding if you’re eligible for a home loan.
Implications of a Bad Credit Score
As a first-time homebuyer with a bad credit score, you may face several hurdles when you apply for a loan to buy a house. These include higher mortgage interest rates, larger down payment requirements and a more limited selection of loan programs.
Despite these obstacles, options are still available, such as FHA loans, which are accessible to buyers with lower credit scores.
What is Generally a Good Credit Score for a First-Time Home Buyer?
If you have a minimum score of 620, you could get approved for a conventional mortgage. A credit score below 620 usually prevents you from getting a conventional mortgage, but other solutions are available. A consumer with a low credit score can seek a government-backed mortgage, like a Federal Housing Administration (FHA) loan. More on that shortly.
What are The Most Common Qualifications for First-Time Home Buyers?
If you’re a first-time home buyer, you’ll likely need to meet the following eligibility criteria:
- Have an acceptable credit score and debt-to-income ratio
- Have at least two years of consistent employment history
- Have a steady, verifiable source of income
- Have an acceptable amount of reserves post-closing (preferably two to three months of mortgage payments)
Typical Credit Score Needed Per Loan Type
Conventional Loan
You could be eligible for a conventional mortgage with a minimum credit score of 620. However, a credit score of 700 or better is ideal if you want to secure a lower interest rate. You can also get away with a 3% down payment if you have an excellent credit history. Fannie Mae and Freddie Mac have conforming limits that cap how much you can borrow through these loans.
FHA Loan
FHA lenders, or those offering loans backed by the Federal Housing Administration, have a more generous minimum credit score requirement. You only need a 580 credit score and a 3.5 percent down payment to get approved. If your credit score is between 500 and 579, you may still qualify for a loan, but you’ll have to make a 10 percent down payment. You can only use an FHA loan to purchase a primary residence, so it’s best for first-time homebuyers. You also won’t have as much money to use since the maximum capital for these loans is lower than conventional mortgages. You will also have to pay private mortgage insurance for 11 years or the life of the loan, depending on which is shorter. Many people refinance out of FHA loans after building up enough equity and raising their credit scores to get out of PMI payments.
VA Loan
There’s no official credit score requirement. However, most lenders set their own minimum for VA loans, which are insured by the Department of Veterans Affairs. These loans provide lower mortgage rates, and you can get a loan with no money down.
USDA Loan
Like the VA, the USDA (US Department of Agriculture)also doesn’t set a minimum credit score for potential borrowers. However, it’s a good idea to have at least a 640 as it’s the figure required by most lenders to be considered for a home loan. A high credit score also entitles you to more financing options and can help you secure a lower interest rate.
Jumbo Loan
Terms vary for each lender, but most prefer borrowers with higher credit scores. A 680 could be enough to get you in the door, but a 740 or better will land you a better interest rate. Borrowers seek jumbo loans when they need more capital than what Fannie Mae and Freddie Mac can provide. Aspiring homeowners or investors can borrow up to $5 million from some jumbo loan providers, a significantly higher total than what you can get from traditional banks.
Tips Before Buying Your First Home
Ready to find your first home? Here are some tips to keep in mind as you conduct your search and plan for the big day.
Assess Your Budget
First-time homebuyers have to contend with monthly mortgage payments, and they can become stressful if you are unprepared or take on too much. You should consider if you can comfortably afford to add a mortgage payment to your spending plan or if money is tight. Aspiring homeowners with tight budgets can take some time before purchasing a home to reassess their budgets. You can monitor your expenses by reviewing your bank account and credit card statements. If you have never done this before, you can find unnecessary monthly subscriptions that no longer have any purpose in your life. Canceling these plans and reviewing each purchase with the same mentality can add room to your budget for monthly mortgage payments.
It may be necessary to defer buying a home until you’re in better financial shape. Rushing into homeownership and then having to give up your home will hurt your finances and ruin your credit history. Instead, it’s better to take a patient approach, and if finances are still tight, you can go with a 30-year mortgage instead of a 15-year mortgage to save on monthly payments.
Determine How Much You Can Afford
Buying a home is more than a mortgage. You have to accumulate enough funds for a down payment and anticipate other expenses, such as property taxes, insurance, HOA fees, and mortgage insurance if it applies to you. These expenses keep coming up, even after you own the home and pay off the mortgage. It’s easier to manage these smaller expenses and a few surprises along the way (i.e., repairs), but it’s a good idea to establish how much room you have in your budget for monthly expenses.
A mortgage loan calculator can lay the groundwork and help you determine how much home you can actually afford. Knowing how much you can afford each month can guide your home price range and your down payment. Of course, you can make a lower down payment to acquire a larger home, but you should only follow that strategy if you can afford the monthly payments.
Look at More Affordable Locations
Location is the most crucial factor for any real estate property, and depending on how far you want to look, you can find great neighborhoods at attractive prices. Rural areas and small towns tend to be more affordable than cities and their surrounding suburbs, especially if you stay away from the coasts. You will need a significant down payment in some areas, but expanding your search opens up more opportunities and can help you save a lot of money. Granted, you shouldn’t settle for a place you don’t enjoy just because of a lower price tag. Buying a home is a big decision, and location is a central component.
Shop Around for Lender Rates and Fees
Patience is a virtue. We hear this a lot, even for the little things in life. Buying a home isn’t a little thing. It’s a big deal that is exciting for first-time homeowners, and if you look at several lenders, you can save on mortgage rates and fees. Since lenders have different terms and requirements, you can find the best deal by shopping around instead of doing business with the first lender you find.
Using the preapproval feature for each lender gives you an idea of what types of terms you can get. You will get an idea of the monthly payment, mortgage rate, and other details. Another advantage of preapproval is that it does not hurt your credit score. Lenders only do a soft pull on your credit to assess your finances during the preapproval process. Lenders only do a hard credit check if you apply for the loan that shows up during the preapproval process.
Improve Your Credit Score First
The best financing offers are generally reserved for borrowers with good or excellent credit scores. Checking your credit report and score three months before applying will reveal where you stand. In addition, many lenders post their requirements online so you can compare your score with requirements to determine which opportunities to pursue.
If your credit score is on the lower end, it’s best to work towards improving your credit before seeking a home loan. This groundwork will set the stage for a lower interest rate, and getting a few basis points knocked off the mortgage rate can save you thousands of dollars over the loan’s lifetime. You should also dispute any information that is not accurate on your credit report with the applicable credit bureau(s), as errors on your report could be dragging down your score.
If you don’t want to do the work yourself, The Credit Pros can help you improve your credit score fast and prepare you for the home-buying process. With their expertise and personalized solutions like easy-to-read credit reports and personalized score insights, The Credit Pros can help you reach your financial goals faster and more effectively. Contact them today for a free consultation with no obligation to sign up. Call (727) 306-8201 or fill out a form to get started on improving your credit score and achieving your dream of homeownership.
Pay Down Existing Debt
Paying off existing debt presents several advantages for aspiring homeowners. This action will improve your credit utilization ratio, a metric that measures how much money you have borrowed against your credit limit. Getting lines of credit with higher limits will improve your credit utilization, but it’s better to pay it off. Less debt also strengthens your debt-to-income ratio, which matters just as much as your credit score. A borrower with an excellent credit score won’t get a mortgage if they have a 70% debt-to-income ratio.
Paying off other financial obligations also puts you in a better position to cover the mortgage, property taxes, insurance, and other costs of homeownership. So, it’s a good idea to develop strong financial habits now instead of waiting until the day you acquire your first home. With a reduced debt burden, you could also make two payments to your mortgage each month to get out of debt sooner and pay less interest over the loan’s lifetime.
Capitalize on First-Time Homebuyer Programs
Many states have first-time homebuyer programs and other incentives to encourage people to buy homes. Some of these programs offer grants to qualifying applicants, which means you won’t have to repay the debt. The grant may be enough for the down payment, and then you will have to cover the mortgage, but you do not have to repay the capital you receive from a grant.
FHA home loans are also great resources for people getting started. You don’t need a high credit score to get one of these loans. If you didn’t have any luck with a conventional loan, an FHA loan is a useful financial product worth a closer look at.
Consider a Multifamily Property
A single-family home is a popular residential property, but multifamily properties can pay for themselves over time. You can live in one of the units and rent the other unit to tenants. Conventional mortgages and FHA loans give you the flexibility to purchase real estate with 2-4 units. One of the units must be your primary residence for at least one year to qualify for an FHA loan. These properties require higher down payments and mortgage payments in the beginning, but filling up units can turn your multifamily property into a successful house hack that saves you money. A 2-4 unit property is also a great introduction to real estate investing for people who want to go beyond owning a single property.
How to Apply for a Mortgage as a First-Time Home Buyer
When you’re ready to apply, here’s how to move forward:
- Figure out how much you can afford. Look at your finances and use an affordability calculator to estimate how much of a monthly mortgage payment you can afford.
- Check your credit score. Knowing where you stand can help avoid confusion as you begin the lending process.
- Save for a down payment. Start saving up for a down payment to minimize the amount you need to borrow and to meet the lender’s guidelines.
- Possibly attend a homebuyer education course. It can help you learn more about the home-buying process so you’ll know what to expect every step of the way.
- Explore different mortgage options. Do your homework to learn more about the types of home loans available.
- Shop around for the best mortgage rate. Get pre-approved with at least three lenders and compare loan quotes to find the best fit.
- Apply for a mortgage. Fill out and submit a loan application with the lender you select.
- Go through the loan approval process. The lender will review your application’s supporting documentation and issue a lending decision.
- Close on your home and get the keys. If approved, finalize the paperwork, attend closing and say hello to your new home.
FAQs About Good First Time Home Buyer Credit Score
The best rates are accessible to borrowers with higher credit scores.
No, minimum credit score requirements vary by lender and mortgage program.
Yes, some programs help those with lower credit scores, though options may be limited.
