First Time Home Buyer’s Credit Score FAQ Roger Odoardi If you aren’t sure what credit score you need to become a first time home buyer, refer to this comprehensive FAQ. What is a credit score? A credit score is a numerical representation of an individual’s credit worthiness based on a number of factors, including their payment history, their current amount of debt, the length of their credit history, how many lines of credit they have open, how many recent inquiries for credit they’ve made and the type of credit they use. Credit scores also take into account whether the individual has a history of bankruptcy, whether they consistently make payments and the length of their credit history. Though it isn’t the only type of credit score, the Fair Isaac Corporation (FICO) credit score is the standard and the most common point of reference for lenders. FICO credit scores typically range from 300 on up to 850. Why is credit so important to lenders? Lenders refer to your credit score as a means of evaluating your potential risk as an “investment,” so to speak. Once you’ve applied for a mortgage, an underwriter will review your credit score, credit history, employment history, income stability and debt-to-income ratio on behalf of the lender. The lender uses this information to determine how likely you are to repay your loan on time. A higher credit score indicates that you have multiple lines of credit open and have consistently made monthly payments on all of them, which demonstrates personal responsibility and that you possess the necessary capital to pay off your loan. The more likely you are to make monthly payments on time, the more appealing of an investment you are to the lender and the more likely you are to receive mortgage approval. What constitutes as good credit? Generally speaking, the higher the credit score, the better. According to Experian — one of three national credit bureaus — a credit score of 700 or above is generally considered good, while a score of 800 or above is considered excellent. In the mortgage industry, a credit score of 740 or higher is considered top tier and guarantees you certain benefits. What are the benefits of a good credit score? Borrowers whose credit scores fall into the 740 and above category typically enjoy lower mortgage interest rates, lower down payments, greater negotiating leverage during closing and, ultimately, lower monthly mortgage payments. From a lender’s perspective, there’s effectively no difference between an individual with a credit score of 740 and one of, say, 850 with the exception of private mortgage insurance (PMI). In a nutshell, PMI is an insurance policy that protects the lender in the event that you default on your loan. Lenders require home buyers to pay PMI if they put less than 20% down at closing (for a conventional loan). Borrowers with a credit score of 760 or higher are subject to slightly lower PMI rates than those with a score between 740 and 759, though the exact amount varies depending on the terms of the loan. Can I still get a home loan with a low credit score? As a first time home buyer, it’s possible that your credit score doesn’t fall into the illustrious 740 and above category — and that’s OK. Although you’ll likely be saddled with higher interest rates and, as a result, a higher monthly payment, you aren’t necessarily disqualified from owning a home. Credit score minimums vary from one loan type to the next and from one lender to the next. Take a look at the list of questions below to see more specific information about minimum credit score and credit history requirements for each of the major mortgage products available. What is the minimum credit score requirement for a conventional loan? Conventional loans are private-sector loans that are not government-backed and are the most common type of loan. Most lenders will accept a credit score as low as 620 for conventional loans, though some lenders have additional requirements. It’s important to note that are two types of conventional loan, each with their own requirements in terms of credit history. Fannie Mae loans require no minimum number of accounts on a borrower’s credit report to qualify. Freddie Mac loans require at least three accounts on the borrower’s credit report but do not require those accounts to be open and active. What is the minimum credit score requirement for a jumbo loan? A jumbo loan is a mortgage that exceeds the conforming lending limit of Fannie Mae or Freddie Mac. Since they are higher risk, they are the hardest to qualify for, and most jumbo loan lenders require a credit score of 720 or higher. What is the minimum credit score requirement for an FHA loan? An FHA loan is a mortgage insured by the Federal Housing Administration, an office of the U.S. Department of Housing and Urban Development. Home buyers with a credit score of 580 and above are eligible for an FHA with maximum financing of 3.5% down. Home buyers with a credit score between 500 and 579 are eligible for an FHA loan with maximum financing of 10% down. FHA loans do not require a specific number of accounts on a borrower’s credit report to qualify, though three open and active accounts with 12 months of history is standard. What is the minimum credit score requirement for a VA loan? A VA loan is a mortgage issued by a qualified lender and guaranteed by the U.S. Department of Veterans Affairs. VA loans are available to active and veteran military personnel and their families. Although the government doesn’t have a minimum credit score requirement to qualify, most lenders require a credit score of 620 or above. VA loans do not require a specific number of accounts on a borrower’s credit report to qualify, though three open and active accounts with 12 months of history is standard. What is the minimum credit score requirement for a USDA loan? A USDA loan, also known as a Rural Development loan, is a mortgage issued by a qualified lender and guaranteed by the U.S. Department of Agriculture via the USDA Rural Development Guaranteed Housing Loan Program. Most USDA lenders require a credit score of 640 or higher to qualify, however, lower scores may be considered with additional analysis of a borrower’s credit. USDA loans do not require a specific number of accounts on a borrower’s credit report to qualify, though three open and active accounts with 12 months of history is standard. If I’m applying for a home loan with my partner but they have poor credit, can we use my credit to qualify for a better rate? No. If you apply for a home mortgage loan with a partner, an underwriter will look at each of your three scores (Experian, Equifax, TransUnion) and select the lower middle score when evaluating whether you qualify for a home loan and determining the applicable interest rate. This is universal no matter the mortgage product for which you apply. What can I do to raise my credit score? There are a number of things you can do to get your credit score to 740 or above. Obtain a copy of your credit report from the three leading credit bureaus and carefully review each copy, looking for errors, omissions and duplications. If you discover any errors, contact the credit bureau immediately to have them corrected. If you have any derogatory items or past due accounts, call your creditors and make arrangements to pay off your debts. On-time payments are the key to good credit. Set up payment reminders so that you remember to make consistent payments. Many people seem to believe that by not using their credit, they’re improving their credit score, but that couldn’t be further from the truth. It’s important to keep multiple lines of credit open and active and utilize them responsibly. This not only demonstrates that you’re a reliable borrower, but also helps you build a bigger credit pool as you age. If you have a low credit score and are having difficulty opening additional lines of credit as a result, consider applying for a secure credit card. A secure card works the same as a regular card, but the borrower offers up collateral in exchange for it — for example, a $500 check as collateral in exchange for a $500 limit. The bank treats this collateral as a deposit and will return it to you after a certain amount of on-time payments, at which point the secured card will become a regular credit card. How many credit cards you have and how you use them is important. You should never maintain a credit card balance that is more than 30% of your available credit. The lower you can keep this balance, the better. Whatever you do, don’t max out your credit card — and try to avoid allowing a large balance to carry over from month-to-month. Limit your credit card usage to necessities, such as groceries and gas. This prevents you from maxing out your card and enables you to make smaller, more manageable monthly payments. **Disclaimer: Blue Water Mortgage Corporation are not credit repair experts. If you need additional help improving your credit score, please contact a qualified financial analyst.** Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.