What Is the Minimum Credit Score for the First Time Home Buyer?
While there is no universally accepted “minimum credit score” for buying a home, home buyers with a score below 620 will find it very hard to qualify for a mortgage.
Each loan program and lender has its own accepted minimums. We’ll dive into many of those options below.
What is the Minimum Credit Score for the First Time Home Buyer?
There is no formal standard minimum credit score for buying a house using a conventional mortgage loan. However, the government-backed mortgage loan programs do have requirements and those with a score below 500 will generally not qualify.
What constitutes a good or bad credit score to a loan officer? According to Equifax, the credit score ranges are as follows:
- Excellent: 800+
- Very Good: 740 to 790
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 579 or lower
The two general categories or common home loan types include conventional mortgage loans and government-insured loans. Conventional loans are privately-insured and have a large share of the original (primary) home loan and refinancing market.
Conventional loans do not apply to second mortgages, which are loans to existing homeowners. Conventional loans typically offer very competitive rates; therefore, those with low credit scores of below 620 will generally not qualify.
One requirement for conventional loans is that borrowers who lack a 20% down payment must maintain private mortgage insurance. The mortgage insurance requirement remains until the payments made reach the 20% equity threshold.
Within the conventional loan category, there are some “non-conforming” types, one of which is the jumbo loan. A jumbo loan exceeds the maximum loan limit established by the Federal Housing Finance Agency, which currently begins at roughly $548,250.
Based on the size of a jumbo loan and the increased risk, lenders often impose stricter credit and income requirements to qualify and will increase the interest rates. For example, jumbo loan interest rates from Rocket Mortgage have increased from .25% to 1.0%.
The three most common government-insured loans include those involving the Department of Veterans Affairs (VA loans), Federal Housing Administration (FHA loans), and the U.S. Department of Agriculture (USDA loans).
The government does not assume the role of a direct lender in these programs; rather, they provide protection and incentives to motivate existing financial institutions operating in the housing market to extend financing to those who may otherwise not qualify.
VA loans are exclusively for military members, veterans, and their spouses. VA loans do not require a downpayment and have no formal minimum credit score requirement.
Different requirements might vary by lender, but for a VA loan from Rocket Mortgage, the minimum median credit score is 580. Although mortgage insurance is not required, the VA does impose a funding fee that is illustrated in the table below.
Funding Fees for VA Loans (First-Time Borrowers)
|Down Payment||Funding Fee %||Amount Borrowed||Total Fee|
|Below 5 %||2.30 %||$ 200,000||$ 4,600|
|5 % to 10 %||1.65 %||$ 200,000||$ 3,300|
|Over 10 %||1.40 %||$ 200,000||$ 2,800|
|Below 5 %||2.30 %||$ 300,000||$ 6,900|
|5 % to 10 %||1.65 %||$ 300,000||$ 4,950|
|Over 10 %||1.40 %||$ 300,000||$ 4,200|
Source: VA Funding Fees
USDA loan programs are intended to expand homeownership among lower-income residents and economic development specifically in rural communities.
The loans feature no down payment requirements and offer reasonable interest rates, particularly for those with good credit.
Mortgage insurance called a “guarantee fee” is required unless you have a 20% down payment. The fees include 1% of the amount borrowed due at closing and 0.35% of the loan amount paid each year, which does apply for the full duration of the loan.
Generally, a minimum credit score of 640 is required; however, those with a substantial down payment may qualify despite having a lower score. Your monthly mortgage payment also may not exceed 29% of your gross monthly income.
FHA mortgage loans are a good option for first-time homeowners with verifiable income, below-average credit, and a small amount for a down payment.
FHA lenders will usually approve those with a 580 score that have a 3.5% down payment or a 500 score for those with 10% down.
FHA loans have a form of mortgage insurance that typically requires paying a 1.75% fee at closing and an ongoing annual premium that is usually below 1%.
Most FHA loans require borrowers to have a debt-to-income ratio (DTI) that does not exceed 43%. Here is how you would calculate your DTI:
DTI= Total Monthly Minimum Debt Payments / Monthly Gross Income
What is a Good Credit Score to Buy a House?
We have established that a 500-credit score is the lowest possible for those seeking to finance the purchase of a home, which applies to FHA loans for those with a 10% down payment. As your credit history improves, you begin to potentially qualify for more options with better terms.
Credit Score: 30-Year Conforming Conventional Loan
|Borrower’s FICO Credit Score||Home Loan Amount||APR||Monthly Payment||Total Interest Paid|
|760 to 850||$ 200,000||6.244 %||$ 1,231||$ 243,035|
|700 to 759||$ 200,000||6.466 %||$ 1,260||$ 253,480|
|680 to 699||$ 200,000||6.643 %||$ 1,283||$ 261,881|
|660 to 679||$ 200,000||6.857 %||$ 1,311||$ 272,123|
|640 to 659||$ 200,000||7.287 %||$ 1,369||$ 292,975|
|620 to 639||$ 200,000||7.833 %||$ 1,444||$ 319,953|
Source: The MyFICO Mortgage Rate Calculator. Rates from March 18, 2023.
As the table indicates, those with bad credit will pay significantly more interest over the term of a mortgage. Borrowers with fair or bad credit should also remember to shop around among banks, credit unions, online lenders, etc.
How to Improve Your Credit Score
Many prospective homebuyers recognize that entering a long-term financial agreement like a home mortgage from a position of weakness generally results in substantial financial ramifications. Therefore, this justifies making the effort needed to improve your credit report.
Use a Credit Builder Loan Service Like Credit Strong
A credit builder loan from Credit Strong is an innovative option that allows for boosting credit and building savings. The credit builder loans from Credit Strong have fewer initial barriers than many alternatives that may have credit, income, deposit requirements.
Based in Austin, Texas, Credit Strong offers consumers an installment loan where the loan funds are deposited and secured in an FDIC-insured savings account that earns interest. Each month, you make an affordable, fixed loan payment to “repay” the balance.
Over the loan term, Credit Strong reports your payment history to all three credit bureaus to improve your score, which you can track online. At the end of the installment loan payment schedule, you will have built better credit history and now have access to the savings funds.
Keep Your Credit Utilization Low
Lenders that are reviewing your credit report consider a variety of factors.
Among the most important is how well a consumer is managing their debt. For example, having a nearly “maxed out” credit card and making only the minimum monthly payments may indicate financial struggles.
Lenders want to know that a borrower is not “overextended” and that they have some available income each month that is not already allocated for paying debts.
Your credit utilization ratio or credit utilization rate is based on the amount of available credit that you are currently using. Expressed as a percentage, your credit utilization rate is one of the most critical factors that influence your credit score—equating to roughly 30%.
Your credit utilization ratio is the second-most important factor that affects your credit score. If you have one credit card with a $1,000 limit and currently have a $500 balance, your utilization rate would be 50%.
It is generally recommended that consumers maintain a rate of no more than 30%, so look for ways to pay down your existing balances. To maximize your credit score, keep it below 10%.
Other possible ways of boosting your credit utilization rate include requesting a credit limit increase on existing card accounts or opening an additional account.
One way to instantly improve your utilization is to open a Credit Strong Revolv credit builder account. A Revolv account instantly increases your available credit by $500, lowering your total utilization.
Get Secured Credit Cards
Obtaining a secured credit card is another strategy for building credit. To obtain approval for a secured credit card account, you typically will be required to make a security deposit that is equal to the card account limit.
Over the following months, you will use the card for purchases and make monthly payments, which are reported to the credit bureaus. After developing a pattern of responsible card use, the issuer may refund your security deposit and qualify you for an unsecured card.
Keep in mind that while secured credit cards represent a viable opportunity to establish or rebuild credit, they are definitely high-interest sources of financing that commonly have interest rates of 20% and may impose annual fees.
Pay Your Bills on Time
Commit to improving your financial habits by always paying your bills in a timely manner. Consumers that are late with payments typically accrue fees and penalties and incur additional negative credit report entries.
Your payment history is the leading single factor that influences your credit score and establishing a steady, positive track record is critical. Focus on improving your income and living below your means when possible.
Check Your Credit Report for Accuracy and Report Inaccuracies
Equifax, Experian, and Transunion, the three major credit reporting bureaus, each offer consumers a free copy of their credit report each year. Closely review your report to identify any erroneous information that might be adversely impacting your credit history.
A recently posted study revealed that approximately 34% of respondents found at least one error on their credit report. Common examples include incorrectly reported details regarding a credit account and discovering accounts that are not associated with the consumer.
All of the credit bureaus now have a rather simple website form that can be used for reporting possible errors, which could improve your credit.
Can I Get a First Time Home Loan With a 500 Credit Score?
Yes. However, you might qualify for an FHA loan if you have a 500 score and a minimum 10% down payment. The majority of other loan options will require at least a score of 580 and are likely to have high-interest rates and fees.
Eager homebuyers with only a 500-credit score should strongly consider taking some action toward improving their credit history before entering a mortgage agreement with unfavorable terms.
What Is the Downside of an FHA Loan?
FHA loan requirements state that borrowers must move into the property within 60 days and maintain it as their primary residence for at least one year. FHA loans also require borrowers to obtain mortgage insurance that has initial fees and ongoing annual premium payments.
FHA loans also have more stringent property inspection and assessment standards that may not work for “do-it-yourselfers” seeking to apply their skills to improve a “fixer-upper” home.
What Is the Minimum Credit Score Needed for an FHA Loan?
Borrowers with a down payment of 3.5% and a score of 580 may qualify for FHA loans. Keep in mind that you will need a steady, verifiable income source and a debt-to-income ratio that does not exceed 43%.
First-time homebuyers should commit to a comprehensive plan or strategy that involves educating themselves on the home loan market, assessing your available options, increasing income, reducing existing debt, and improving your credit score.
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