Tips for first-time homebuyers: What credit score should you have to get a home loan?

Many people come to a point when they need to decide whether to buy a house. Sometimes you have to uproot yourself from where you’ve been used to because you got a new job, you recently got married, or you’ve found a better opportunity.

There is a first time for everyone, and it isn’t always easy. Each of us has varying learning curves and backgrounds.

If you find that the only way you can buy a house is through a mortgage, we hope to provide you with the knowledge to give you a more smooth sailing journey. Here, we will provide you with some of the best advice you need to read before touching your feet into these waters.

If you are scared, we hope to appease your fears. But, remember, millions of people have been where you are. On the bright side, you will most likely live through this just once!

Minimum Credit Score to Get Home Loan

You must first check before you even fill a mortgage application form is your credit score.

Your credit score is a number that helps mortgage lenders know whether you are a responsible borrower. A high credit score gives you a better chance of qualifying for a mortgage and negotiating for better terms. Conversely, lower credit scores tend to provide you with fewer options and more expensive interest rates.

Today, the lowest possible FICO Score you can have where you will still qualify for a mortgage is 500. However, the mortgage lenders who accept this credit score are few and far between, and you can only apply for government-backed mortgages.

The Good FICO Score range starts at 670, so a 500 rating is a Poor score. You will want to have at least a 620 credit score to have the most opportunities. This is the minimum credit score required for traditional mortgages called conventional loans.

Top Ten Tips

1 – Talk to people

One of the benefits of today’s technology is the ability to research almost anything via the internet. So here you are now, reading about the minimum credit score requirements of mortgages and what to do.

Still, we recommend getting the advice of your immediate circle.

There are thousands of mortgage lenders in the country, and there are even thousands more offers that they can provide. However, you might be limited to mortgage lenders in your location. You might read reviews for these lenders online, but these will come from absolute strangers the lenders themselves may have paid. Therefore, it is better to hear from people you know.

Find out whether you have friends who are already paying for mortgages and if they have a specific company to recommend. Again, the most honest opinions can give you the best guidance.

2 – Know your three credit scores

If you didn’t know, the three credit bureaus (Equifax, Experian, and TransUnion) could compute for three different FICO Scores.

When you apply for a mortgage, the lender will get your three credit reports. If your credit scores vary, mortgage lenders make use of your middle score to judge your application. You won’t get the benefit of your highest credit score. On the upside, if you only know your lowest FICO Score, you might turn out to have a higher credit score for your loan application.

You don’t want to be blindsided if your true FICO Score is far from what you know.

3 – Shop around for the best lenders

For each loan type, there is a minimum score required. Additionally, mortgage lenders set credit score requirements of their own. These are called overlays. As if those weren’t enough, each lender can offer a different interest rate or loan amount.

A study found that almost one out of every two borrowers do not compare and contrast loan offers. Instead, they usually sign with the very first lender they learn. Don’t be one of these people.

There is an excellent chance of a competing offer out there that will save you thousands of dollars. So make a list of recommendations you get and then set out to do further research.

4 – Hire a mortgage broker

The mortgage process can be very time-consuming and stressful. If you want to save yourself from all the legwork, you can delegate this task to a mortgage broker.

Mortgage brokers or advisers will have lots of contacts in the industry and enough experience to help you navigate the loan application process. Although you may have to pay a fee for their services, the cost may be cheaper compared to the expenses derived from searching for a private lender on your own.

Each time you talk to a lender, your credit score will lose a few points because they’ll pull up your credit history, and this will be recorded as a new credit application whether you are approved or not. Your mortgage broker will pull up your credit report just once. You will still lose some points, but at least you won’t create as much damage.

Since the mortgage broker will also be more knowledgeable about the terms, they can help you identify whether you are getting a good offer or a bad one. The devil is in the details!

5 – Get a mortgage pre-approval

Something that may also not occur to you is getting a mortgage pre-approval letter.

When you go for a pre-approval, it’s essentially a test run of your loan application. You’ll find out whether you meet a lender’s requirements, but more importantly, you’ll find out what kind of budget you should keep in mind when you shop for your house.

Many people don’t do this part anymore because it’s more exciting to jump ahead and attend open houses. However, there is always the possibility you will find a place you absolutely love, but then it turns out you cannot afford it, mortgage loan or not. So, naturally, you don’t want this to happen.

You want to know if you will afford a down payment and the subsequent monthly payments, so it will be wise to set your expectations. Having that pre-approval letter in your pocket can also give you more negotiating power on the real estate table. It’s an excellent card to have in case you are competing with several other interested home buyers.

6 – Use FHA as a stepping stone

Since you are a first-time homebuyer, you will most likely lean towards getting a Federal Housing Administration (FHA) loan.

This type of mortgage is geared more towards borrowers with low credit scores and low to middle income because the minimum credit score requirement is only 500. If your credit score is somewhere from 500 to 579, you have to make a 10% down payment for this loan. If you have 580 or higher, this 10% becomes a mere 3.5% minimum down payment.

Due to FHA loans’ low down payment requirement despite the greater risk that borrowers represent, an unavoidable mortgage insurance premium you have to pay at closing is inevitable. This makes the FHA loan a little more expensive than some types of loans. Furthermore, if you choose to pay less than 10 percent, you pay for additional mortgage insurance charges every month for the life of the loan. If you have a 30-year loan term, this is not a small amount of money for you to disregard.

If you opt for an FHA loan, we highly suggest that you keep a lookout for a possible refinance in your future. This might be inevitable, especially once you start calculating the costs. If you can improve your credit and gain enough equity, you’ll be able to save more money later on if you switch to another mortgage that doesn’t charge for mortgage insurance.

7 – Get help from friends or family

A 3.5% down payment may not sound like much, but since we’re referring to a mortgage loan, this still means thousands of dollars. Everybody needs help sometimes, and it wouldn’t hurt for you to make it known to your loved ones if you require assistance.

Be informed that the FHA allows loan borrowers to get their down payment funds from gifted cash freely given by family or friends who have an interest in your home purchase. Note that you will have to procure writing that will confirm that they won’t seek compensation.

8 – Check for down payment assistance programs

The FHA is also partnered with a lot of local down payment assistance programs.

Aside from gifted funds from friends and family, you are also allowed to use a cash grant to pay for your FHA loan down payment. Bear in mind, though, that this is another loan that has an interest. So, as much as possible, it’s better to have more skin in the game by using your savings for a deposit.

Still, it’s good to know that there are options if you do not have the liquidity.

9 – Consider buying rural

If you already plan to buy a house in a rural location anyway, that’s perfect! If not, the benefits might convince you.

The U.S. Department of Agriculture (USDA) insures a mortgage, often referred to as a rural housing loan.

The USDA loan is a zero-down payment mortgage with no minimum credit score requirements. As long as your area fits the USDA’s definition of a rural location, you have a fair chance of qualifying for this government-backed loan.

Check this link to find out if you are eligible.

10 – Improve your credit score

Finally, as you must well know by now, you need to aim for a good credit score.

If your score is below 670, this is bad credit which might make you pay for a more costly mortgage. As good as the intentions are of government-backed loans like FHA loans and USDA loans if you end up paying more than you should, in the end, they’re not helping. So help yourself by maintaining an exceptional payment history on your debts, checking your credit report for errors, and avoiding credit card debt.

You deserve the most competitive interest rates that many lenders can offer. You owe it to yourself!