What credit score do you need to buy your first home?
Understanding your credit and credit score is a crucial first step in the home-buying process. Your credit score helps determine the interest rate and other costs you pay on a mortgage loan — meaning it determines how good of a deal you can get.
So when you’re preparing to start the home-buying process, you need to get an official copy of your credit report from each of the three main credit bureaus (you can do this once a year for free). You want to make sure that there are no mistakes or other issues you didn’t know about that may impact your ability to get a good deal on a mortgage. And depending on what you find, you may have to delay the process and begin repairing your credit — in order to get the best deal on a loan.
How your credit impacts your ability to get a mortgage loan
How lenders use your credit
If your credit score is high, it shows lenders that you’re financially responsible and that you haven’t racked up a bunch of debt you can’t pay off. Lenders consider it likely that you will pay your monthly mortgage payments consistently and on time, which means they are willing to offer you a lower interest rate and other costs on your loan. The best deals are typically reserved for those with a credit score of 700 or higher.
If you have poor credit, lenders see you as a bigger risk — they aren’t sure that you will be able to pay your monthly payments based on your financial history. This typically means they will charge you a higher interest rate in exchange for taking the risk of loaning you the money to buy a house.
“Below 680 is when the friction starts and as you get down to 620 it gets increasingly difficult. The fees are going to go up and the ability for you to get a lower down payment mortgage is going to be hard,” says Bill Banfield, executive vice president of capital markets for Quicken Loans.
How lenders view different credit scores
Here are some general rules of thumb to go by when it comes to credit scores and the ability to get a conventional, fixed-rate mortgage loan (the best option/deal):
Any score in the 700s or above is considered excellent and will most likely get you a loan with the lowest interest rate.
When your score drops into the 600s, lenders start to see you as a higher risk and you won’t be able to qualify for the best rates. A score of 680 is still considered decent, but when you get below the 660s, many lenders will start denying your request for a mortgage loan. For other lenders, a lower score in the 600s may be the cut-off. It all depends on each specific lender’s required qualifications.
So, if your credit score is in the 700s, you should be ready to get pre-approved for a conventional loan. If your score is in the 600s or lower, you will need to go another route.
One common misconception is that you have to have a near-perfect credit score in order to get a mortgage loan. Of course the higher your score the better, but even with decent credit, you can still qualify for some loan programs. And in fact, even if you have poor credit, there are still options available.
How to get a mortgage loan with decent to bad credit
There are other mortgage loan programs available besides just the conventional, fixed rate mortgage loan from a traditional bank or lender. These are easier to qualify for and even designed for borrowers with credit scores as low as 500. The type of deal you can get is still determined by your credit score and other factors, so you want to get your score as high as you can before you start the mortgage qualification process.
“The best loan programs will always be available to those with higher credit scores; however, there are many products in the market for buyers who are in the process of repairing or building their credit,” says Rachel Brochstein, an Atlanta-based realtor. “Every buyer’s situation is unique and finding the right lender with the right programs is important to make the transaction a financial success.”
So if your credit isn’t in great shape, here are a few steps to take in order to get an affordable mortgage loan.
Improve your credit score
By following a few strict rules, you can increase your score by a lot, and quickly. Doing so would potentially help you qualify for the best rates available in today’s market. Here’s how to increase your credit score quickly.
One thing to remember when you’re repairing your credit in order to buy a house is that you should not apply for more credit, including credit cards. This will make lenders suspicious of your financial stability. Plus, applying for new credit damages your credit score even further in the short term.
Check eligibility for FHA and VA loans
Find out if you are eligible for an affordable mortgage backed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA). FHA and VA loans are backed by the federal government and have less-stringent credit requirements.
FHA loans are issued by FHA-approved banks and other mortgage lenders. These loans are guaranteed by the government, which means lenders are more willing to lend to borrowers with lower credit scores. You can qualify for a 10% down FHA loan with a credit score as low as 500. If your credit score is 580 or higher, you may qualify for a loan with as little as 3.5% down. One catch though is that FHA loans require you to have mortgage insurance, which will drive up your overall and monthly costs. But when it comes to perks, FHA loans typically have:
Lower down payments than conventional loans
Lower closing costs
Easier qualification
For military service members, veterans, and their spouses, VA-approved lenders offer affordable mortgages with as little as 0% down. To apply, you need to have a valid Certificate of Eligibility that proves your (or your spouse’s) service history.
With a federal guarantee on a portion of the loan, VA loans have several advantages for bad-credit borrowers:
No down payment
No mortgage insurance requirement
No minimum credit qualifications
Lower closing costs
One-time funding fee that can be financed
According to Bankrate, “another benefit of FHA and VA loans is that the rates are on par, or sometimes even lower than conventional loans.”
Come up with a larger down payment
Being able to offer a bigger down payment can often get you a better deal from a lender, because it shows you’re willing to take on more of the risk and the lender won’t have to loan you so much money to buy the home. So if you can delay your process and save up more cash (by taking on more work, selling things or getting help from family), you will get a better deal on a loan when the time comes.
If you go this route, the money needs to sit in a savings account for a period of time before a lender will view it as viable. “The lender has to know where that money came from, so let it season in an account for at least 60 days. Otherwise you might not be able to use it right away,” Banfield told Bankrate.
Shop credit unions and community banks
Check your eligibility to join a credit union here.
With credit unions and community banks, the lending criteria is often less strict than that of traditional, big banks.
Credit unions are not-for-profit financial institutions that exist to serve their members, so they often offer more favorable terms than big banks.
Always shop around!
When it comes time to apply for a mortgage, don’t just settle for one offer from one lender. You need to shop around for the best offer, just like you would with anything else.
“One of the most important things that people don’t realize they need to do is to shop around for different loan options from different lenders,” says Brochstein. “When shopping around with different lenders, you always want to request a ‘fee sheet,’ which is a breakdown of the actual loan and costs associated with closing the deal. You can then take the sheet to other lenders to try to get a better deal.”