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Home Bought by First Time Home Buyer Denver

What Credit Score is Needed to Buy a House?

Whether you're a first time home buyer or not, purchasing a home is a major milestone in a person's life, but not everyone has the right resources to achieve it. Several factors must fall into place, such as a steady income, enough savings, and more importantly, a solid credit score.
Your credit score is a good indication of what your home-buying experience will be like. If you're interested in becoming a homeowner, learn all the ins and out of credit scores below to find out how you can make it happen.

What Do Mortgage Lenders Look For?

Before getting into credit score requirements, it's important to first understand what mortgage lenders look for when
approving loans for potential home-buyers.
First off, a credit score is more or less a grade compiled from your borrowing history. With that in mind, mortgage lenders aim to explore your entire financial background to get a sense of your total reliability. Here are the criteria that lenders research:

Credit History

Family Heading to Denver Mortgage Company Office

Your credit history involves many factors that make up a general overview of your borrowing experience. For example, a mortgage lender may research instances of past foreclosures, bankruptcies, delinquent accounts, outstanding debts, tax liens or civil judgments, and the number of recent credit applications opened. Of course, having run-ins with any of these situations doesn't mean automatic disqualification from buying a home, but it certainly sends a few red flags to a lender that may result in a higher interest rate if you get approved.

If you have any negative items affecting your credit click here for assistance to get them removed and start improving your score!

Debt-to-Income Ratio

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Your debt-to-income ratio represents your monthly earnings compared to your regular expenses. Someone with a high income and high expenses is likely to be at risk for a lender because financial habits show an unhealthy pattern. On the other hand, having too low of an income is a quick indication of not being able to afford a home altogether.

Overall, those with the lowest risk are candidates with a high income and low expenses. Research shows that a debt-to-income ratio less than 40% is a safe place to be in order to qualify for a competitive loan.

Calculate Your DTI Ratio

History of Employment

Relieved Customer After Approved Mortgage Goes Through

Lastly, a mortgage lender will inspect your history of employment to see how reliable your income has been over the past couple of years. If you were unemployed at any point during the last 24 months or if your job is unstable (self-employed or freelance), you may be denied or given a higher interest rate to offset the discrepancy. If you’re self-employed, we just made it simple for you to qualify for a mortgage loan with our Entrepreneur’s Advantage™ product.

Learn More

Is there a Minimum Required Credit Score?

A minimum required credit score to buy a home really depends on the type of loan you apply for. As a general rule of thumb, credit scores above 580 put you at the lowest range of approval for a Federal Housing Administration (FHA) loan for a minimum down payment amount of 3.5%. With FHA loans, under a case-by-case review (and depending on your lender), can go down to a credit score as low as 500 but those typically require a minimum down payment of 10% or more. Nonetheless, getting approved with a 580 score can still be challenging, or require compensatory factors, and increasing your score is recommended before applying.

Keep in mind, a credit score is just an indication of your accessibility to a home loan. One that's “low” doesn't mean you're ineligible to get approved, but it does make the process a bit more complicated with higher interest rates, leveraging collateral, and higher down payments.

What Type of Loan Can I Get With My Score?

An FHA loan is the most attainable loan type since lenders are backed by the Federal government and their mission is to aid in extending credit to those who fall outside of the guidelines of a conventional loan.

With that in mind, there are other loan types that offer specific benefits. Here are other minimum required scores to check out depending on various loan types:

Jumbo Loan

USDA Loan

Conventional Loan

VA Loan

FHA Loan

According to research from Experian, a credit score of 700 or higher is considered good. However, the average credit score is between 600 and 750. The good news is that US Mortgages works with individuals that have a credit score down to 500, so don’t let a past problem keep you from getting started. We don’t charge up-front fees so there is no risk and nothing to lose. We are here to say yes even when others say no.

Even if you’re struggling with your credit score, US Mortgages can get you on track! If you’re wondering what your score is, check out this handy tool below:

Ready to Get Started!

Can I Buy a House with Bad Credit?

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Mentioned earlier, it is possible to buy a home with bad credit, but other stipulations arise in order to compensate for a low score. Typically, a score below 580 puts you at risk of being denied credit in several ways. From basic credit card applications to home loans, scores within the 300 to 579 range are tough to work with since multiple factors contribute to a subpar standing.

This is where working with an expert can be valuable to aid in structuring a loan that is likely to be approved. It's particularly important to find a lender that doesn't have bank overlays to contend with and that has the same mission as the Federal Housing Authority -- to aid and assist those looking to buy homes that don't meet the standards of a conventional loan. Keep in mind that to help offset risk in these situations the minimum down payment rises from 3.5% to 10% (or more depending on other factors). That being said, some mortgage lenders will still grant a home loan with flexible rates if you're within the 620 to 700 range.

Unsure of your credit? Check it here without impacting your score!

In addition to a higher APR that corresponds with your credit score, lenders may also increase your down payment as a precaution. Standard protocol for conventional loans typically ask for a down payment of 20%, but mainstream trends have shown much lower payments over the years. In 2018, 55% of buyers who took out a home mortgage paid 6% or less as a down payment. Not to mention, 72% of first-time homebuyers who took out a mortgage followed the same strategy. Plus, there are plenty of loan programs that let you have a down payment you are comfortable with. The bottom line is that a low credit score results in a higher down payment. A lender may not suggest something as high as 20% down, but anywhere around the 6%-10% threshold isn't uncommon. Once again, FHA loans offer a variety of benefits for potential homebuyers with bad credit because initial credit scores can be relatively low and down payments only require 3.5% for credit at 580 and above.

Needless to say, having a low credit score certainly comes with its disadvantages, but more often than not, certain measures can be put into action to increase a credit score and earn better terms for affording your future home.

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Tips to Improve Your Credit Score

It may seem like an overwhelming task, but improving your credit score can be simplified into a few routine steps that lead to a huge difference over time. Without a doubt, changes won't happen overnight, but the good news is that while you're implementing a strategy, it gives you the flexibility to save up and search for the best mortgage deal when you're ready!

If you feel like your credit score could use a boost, here are several tips that can help:

Pay Your Bills On Time

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This is the number one way to avoid late charges and bad marks on your credit history. Paying your bills on time lets creditors know that you can handle your borrowing and earn enough income every month to fulfill payments. Plus, it shows diversification in your spending and saving habits that aid in developing your overall financial experience. Trouble paying your bills on time usually stems from poor scheduling and reminders, so a great way to fix this problem is to setup auto pay features with your credit cards or set your own date each month (before your actual deadline) that you can easily remember.

Keep in mind, a missed or late payment on a credit card stays on your credit history for 7 years, although its impact on your score lessens over time.

Manage Debt and Maintain Low Balances

Couple Researching Best Loan Offers from Mortgage Companies

Having some debt is okay, but too much debt across multiple lenders becomes problematic and negatively impacts your credit score. To combat this issue, it's best to identify your lowest debt amounts and pay them off immediately. 

For instance, if you have three credit cards with $300 of debt on each and two credit cards with over $1,000 in debt, focus on paying off the smaller ones first. Maintaining minimum payments doesn't make too much progress on large debt amounts, but if it means that you can allocate more funds towards eliminating smaller debts, the trade off is more substantial. Plus, once your lower cards are paid off, you can then channel larger payments to your greater credit card debts and pay them off in a reasonable amount of time. 

Your credit utilization ratio should be under 30% to be in the good graces of a lender. 

Keep Old Accounts and Limit New Ones

First Time Home Buyer Family Playing Basketball

Even though you may not use it anymore, old credit card accounts serve you the best when they're left open. Doing this shows that you have a long history of borrowing, which pleases lenders and helps validate your financial experience. If you've just paid off a credit card and don't plan on making any more purchases, just put it away and let bolster your credit arsenal.

Also, while you're maintaining older accounts, you must try your best to not open too many new ones. Whenever you apply for a credit card, an auto loan, or a personal loan, financial institutions make a hard inquiry into your credit report that ultimately hurts your score. To avoid these negative marks, stick with the credit lines you have unless you absolutely have to open a new one. 

Hard inquiries stay on your credit report for 2 years before dropping off.

Improve Your Chances with US

Now that you understand the importance of your credit score, you can take active measures to improve your chances and purchase the home of your dreams. US Mortgages offers a variety of competitive rates for new and experienced homebuyers, and working with bad credit doesn't have to be a roadblock to your future. 

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