Buying a home is one of the biggest investments you’ll make in your life. Unless you’re planning to pay cash, you’ll need to secure financing prior to beginning your home search.
Ideally, you should only consider lenders that offer home loans with competitive terms. However, it’s equally important that your finances and credit health are both up to par to get access to the lowest interest rates the lender has to offer.
But 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.
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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.
This three-digit number paints a picture of how you manage the funds that you borrow. The FICO score is the most prevalent credit score as it is used by 90 percent of creditors and lenders to make a decision. It ranges from 300 to 850 – the higher, the better – and comes in many different variations.
Most mortgage lenders use FICO Score 2. They pull it from the three major credit bureaus – Experian, TransUnion and Equifax – and use the middle figure when deciding if you’re eligible for a home loan. So if you have a 620 or higher, you could get approved for a mortgage. However, a lower credit score could work if you’re seeking 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)
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Typical Credit Score Needed Per Loan Type
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.
FHA loans are more flexible and only require 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.
There’s no official credit score requirement. However, most lenders set their own minimum for VA loans.
Like the VA, the USDA 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.
Again, it varies by 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.
Tips Before Buying Your First Home
Assess Your Budget
Can you comfortably afford to add a mortgage payment to your spending plan, or is money tight? If it’s the latter, take some time to reassess your budget and identify adjustments needed to afford homeownership. You may find that your debt load or other recurring expenses are a major hindrance that must be addressed before you move forward with a purchase. And in some cases, it may be necessary to defer buying a home until you’re in better financial shape.
Determine How Much You Can Afford
If you determine you have room in your budget for a mortgage payment, the next step is to use a mortgage loan calculator to figure out how much home you can actually afford. Beyond the principal and interest you’ll pay each month; you should also factor in the price of property tax, insurance, mortgage insurance (if applicable) and association fees. Doing so will help you identify which homes are in your price range when you start shopping.
Shop Around for Lender Rates and Fees
Not all lenders are the same, so you want to shop around to find the best deal. But instead of formally applying with each lender you find and are interested in, consider using the online pre-approval tool (if offered). It only takes a few minutes, and you’ll get an idea of how much of a loan you possibly qualify for, along with potential terms, interest rates and monthly payment amounts.
Improve Your Credit Score First
The best financing offers are generally reserved for borrowers with good or excellent credit scores. So, check your credit report and score three or so months before you apply to see where you stand.
If your credit score is on the lower end, it’s best to work towards improving it before seeking a home loan. You should also dispute any information that is not accurate on your credit report with the applicable credit bureau(s), as it could be dragging down your score.
You have three options to choose from:
- Small Builder: pay $25 per month for 24 months and receive $520 at the end of the loan term
- Medium Builder: pay $35 per month for 24 months and receive $724 at the end of the loan term
- Large Builder: pay $48 per month for 12 months and receive $539 at the end of the loan term
A $9 administrative fee also applies when you open an account with Self.
Once you’re ready to apply, here’s how it works:
- Step 1: Apply for a Credit Builder Account with no impact on your credit score. If approved, Self will place the funds in a certificate of deposit.
- Step 2: Make timely monthly payments that are reported to the credit bureaus to help improve your payment history.
- Step 3: Unlock your CD and access your funds (minus interest and fees). You’re free to use the money towards your home purchase or however else you see fit.
Visit the website or download the mobile app to get started with Self today.