First time homebuyers are in a great position to get great rates and lucrative terms on their mortgage today. What used to be a very restrictive mortgage industry is finally loosening up to make it easier for many people to get a mortgage no matter their situation in life. Of course, with every loan comes the need to have a minimum credit score. There are some loan programs, such as FHA and VA loans that offer the ability to provide alternative credit lines in the place of a traditional credit score. These programs allow you to use your insurance payments, rent payments, and even utility payments as proof of your financial responsibility. Some lenders that offer manual underwriting of conventional loans may even allow for nontraditional credit, but you have to check with each lender to see what they will accept as every lender has their own requirements.
General Minimum Credit Scores Required for Mortgage Loans
If you had to put your finger on one magic number that would render you the ability to get a loan as a first-time homebuyer, it would be 620. That is the number that once you go below, lenders start to cringe at your loan profile. This does not mean that it is impossible to get a mortgage if your score is lower. It does mean, however, that you are going to have to work harder; be okay with being scrutinized harder; and be ready to pay higher interest rates or fees. Overall, lenders want to see higher credit scores because it means that you have not met with financial demise in the recent past because lenders know how hard it is to bring your credit score back up after it falls. Because this is unfortunately not the case for many people, there are many options for first-time homebuyers that are finding it harder to get a conventional loan than they thought.
FHA Loan Credit Score requirements for First Time Home Buyers
If you are turned down for a conventional loan because your credit score is below the ever so sought after 620 (or higher for some lenders) you still have the option of the FHA loan. This loan offers the ability to put down a small amount of money – only 3.5% and to get the financing you need with a lower credit score. As long as your credit score is not below 580, you may apply for the FHA loan. If your credit score is below 580, you are still not out of luck; you will have to put down more money on the loan however. The FHA sets the bar at 580 for the 3.5% down payment. If your score is below that, you will have to put down a minimum of 10% on the loan. This can be difficult for first-time homebuyers to do since they are coming up with the cash on their own rather than using the equity from another property to put down on the home.
VA Loan Credit Requirements for First Time Home Buyers
If you are a veteran (or your spouse is a veteran), a VA loan is a great option. The minimum credit score for the VA loan is typically around 620. Again, this is up to lender discretion as some lenders will go as low as 580 on a VA loan. What the VA wants to see, however, is very few delinquencies in the last 12 months on your credit report. Because you are a first-time homebuyer you will not have to worry about the VA’s requirement to have zero late housing payments in the last 12 months, but if you were renting, beware that they will check your rent history whether or not you are using alternative trade lines to qualify for the loan. As far as your other trade lines, a maximum of one 30-day late payment is typically acceptable to qualify for the VA loan which requires no down payment and offers very low interest rates.
Conventional Loan Credit Requirements for First Time Home Buyers
Conventional loans are typically the hardest to qualify for, especially when you are trying to purchase your first home. This loan requires great credit scores – they like to see them average around 620 in order to qualify for a conventional loan. In some cases, loans with scores lower than 620 can qualify, but they need to have mitigating factors that make their loan profile appealing. These factors could be a low debt to income ratio (the standard is 28% housing payment ratio and a 36% total debt ratio); longstanding, stable employment; steady income; or a large down payment. If you mitigate the risk that the lender is taking on your low credit score with other positive factors, they are often willing to provide the loan. It is all about providing balance and proving that you are not planning to become delinquent on the mortgage the lender is providing.
If you do take a conventional loan for your first home purchase and you do not put down at least 20 percent on the home, you will have to pay monthly mortgage insurance. The amount of the insurance is based on the loan-to-value ratio and your credit score. The lower your credit score, the riskier your loan becomes and the higher your mortgage insurance payments will be in order to protect the insurance company should they have to pay for your loan in the face of default.
Your credit scores play a vital role in your ability to be a first-time homebuyer. If you have average scores that are no lower than 620, you have many options for a variety of loans as long as your credit history is not blemished with several late payments in the last year. Remember that lenders can look back at your credit history as far as 2 or 3 years ago, so be prepared to have answers for any delinquencies and issues that you have reporting on your credit report. The more prepared you are, the easier it is to get through the mortgage process.