This myth causes many buyers to avoid getting pre-approved in advance. In fact, initial approvals will lead to “stricken enquiries” in your credit report, which will likely cut your score by just a few points. Additional pre-approvals are also unlikely to hurt you. The bigger problem is skipping pre-approval when necessary.
For this reason, due to the importance of buying the best loans and fees, credit companies usually give a 30-day window to get multiple pre-approvals without additional hits on the credit. If you’re still hunting your house for six months or a year and need to get pre-approved again, that’s fine. It should not affect your ability to qualify.
What credit score do you need to buy a house?
One of the most common questions is that first-time buyers ask. What credit score do I need to buy a home? There are no strict rules for this, but you don’t need a good credit to qualify for a mortgage. Some lenders are flexible and have loans and down payment assistance programs available to people with low credit scores.
That said, your credit score will affect your interest rates and loans. Typically, a higher score gives you better options and saves you money. Let’s take a look at some standard loan types and their requirements. However, these minimum scores may vary by lender.
Traditional loans
Minimum score: mid-600s
Traditional loans typically require a higher credit score and a down payment of at least 3% of the home’s purchase price. If you beat less than 20%, you will need to pay for Private Mortgage Insurance (PMI), which increases your monthly payments. Even if it’s under 20%, you’ll still pay less with PMI.
Jumbo Loan
Minimum score: vary, but about 700
Jumbo loans are used to cover higher loan amounts than other traditional loans over $510,400. Due to the large amount, jumbo loans take more risk and require a higher credit score.
FHA loan
Minimum score: 500-580
This type of loan, backed by the Federal Housing Administration (FHA), helps buyers with lower credit scores enter the home. If your score is 580 or higher, you will be eligible for a 3.5% down payment. A 10% down payment is required for a score of 500-579. All FHA loans require mortgage insurance, which increases the cost of the loan. FHA loans can have other drawbacks, so understand the pros and cons.
VA loan
Minimum score: None
Supported by the U.S. Veterans Affairs Administration (VA) these loans are available to members of the military community, spouse, and beneficiaries of the retired military community. You do not need a down payment or mortgage insurance, but you may need to pay the VA funding fee.
USDA loan
Minimum score: 580
USDA loans serve buyers who plan to buy rural homes. You will need a minimum credit score of 580 to qualify.
Other loans
How to improve your credit score if your credit score is low
Once you have checked your credit and spoken to the lender, you can determine that improving your credit is the right next step. Depending on your situation, this could mean a quick fix or a longer repair process. Who are your needs are unique, but here are some general pointers for you to get started.
Make sure your credit report is accurate
If you don’t already have it, please request a free copy of the credit report. Available from AnnualCredItreport.com or from credit reporting agencies at either Experian, Transunion, or Equifax.
Read the report carefully and look for lines of credit or negative items that you don’t recognize. If you find inaccuracies, challenge them at your credit reporting agency. This can take some time, but removing negative items can quickly improve your score. The Federal Trade Commission (FTC) has information on your credit rights and how to fix your credit issues.
If you have a score of 730 or higher, you may not need to adjust to get the highest interest rate available. If your score is low, taking action as quickly as possible will have the greatest impact.
Repay a high balance
The amount of credit card debt that has not been repaid compared to the total available credits is known as the Credit Usage Rate (CUR). Lenders prefer Cur of 30% or less. The credit reporting agency calculates this fee each month after receiving a report of your credit card balance.
Paying off your high balance will increase your credit as your credit score can quickly rebound. However, if you are repaying your credit card, it is best to at least not close immediately. Close your account may damage your score. If possible, keep an account and use them from time to time. Otherwise, the bank may close the bank due to inactivity. Make sure you pay your bills on time.
If you need to close one or two accounts, choose the most recent account. Your oldest credit card has the most weight in terms of your credit history and score. Learn more about how to get out of debt quickly.
Avoid applying for new credits
Each time you apply for credit, your lender will perform a rigorous inquiry about your credit report. This affects the overall credits. If you have multiple inquiries in a short period of time, it can have a compounding effect and further reduce your credit score.
As mentioned above, one exception is pre-approval of a mortgage. You can get multiple pre-approvals in weeks and months without negatively affecting your score.
If you’re tired of receiving “pre-authorized” credit card offers by mail, sign up at optoutprescreen.com. These offers will be suspended for five years. (You can always back in if you change your mind.) If you’re struggling to say no to all the great offers coming, this can be helpful.
Pay your bills on time
This step can take some time to make an impact, but it has a huge impact. Mortgage lenders want to make sure they have a history of paying debts on time, especially over the past 12 months.
If you have some late payments in your credit history, plan your payment methods for the next six months. Schedule automatic payments, set reminders on your calendar, and spend money on special accounts. Knowing that you are planning will reassure your mind.
Contact a lawyer or credit counselor
If your credit report contains some negative items, such as collection, bankruptcy, or accounts you have taken to collect, consider getting external help. Some law firms specialize in dealing with credit issues.
There are also nonprofit organizations that can provide guidance on how to improve your credit score at a lower or no charge. They can help you understand and prioritize your credit situation, allowing you to get back on track.
Finally, there are many for-profit companies that promise to consolidate their debts and improve their credit scores rapidly, but be careful. Many of these services are questionable and do not have the impact you want. Always do your research before paying for services and choose someone with a reliable track record.
How to build credits if you don’t have
If you haven’t had the opportunity to establish a credit history, start now. If you don’t have a credit, you don’t have a score. That means you cannot borrow money.
This may be counterintuitive, but you should start by getting a copy of your credit report. Credit agencies can make mistakes. If so, challenge them and ask for revisions. In the worst case scenario, someone can steal your identity and apply for a line of credit in your name. If you see any signs of this, follow these Federal Trade Commission steps.
Once you have ruled out the credit reporting issues, take your time and build your credit safely and responsibly using the options below.
Use what you have
Ask your utility company and landlord to report your positive payment history to the credit department.
Get a personal loan
Banks or credit unions understand that building credit from scratch is not always easy. Some offer low-risk loans specifically designed to help you build your credit.
Apply for your first credit card
If possible, choose one with a lower spending limit. The best strategy is to charge a small amount that can be easily repayed each month. These payment habits help you build your credit profile as a responsible credit user and as someone who ensures you make payments.
Open a secure credit card
A secure credit card uses a savings account as collateral. Card limits are usually the percentage of the average monthly balance in your savings account. It is best to use this card for small purchases and pay your balance each month. Please note that not all banks and lenders report their protected credit card accounts to credit reporting agencies. Lenders may be willing to convert their accounts to traditional credit cards after a while. Ask your lender about your policy before deciding whether it will help you open an account.
Learning how to improve your credit score and shop for a mortgage can actually go hand in hand. A good mortgage lender can help you create plans to establish credit and increase your low score. No matter where you stand today, it is possible to improve your situation and put yourself in order to buy a home. It may take some time, but the earlier you start, the sooner you will be approved for your first mortgage.
Final Thoughts
Learning how to improve your credit score and shop for a mortgage can actually go hand in hand. A good mortgage lender can help you create plans to establish credit and increase your low score. No matter where you stand today, it is possible to improve your situation and put yourself in order to buy a home. It may take some time, but the earlier you start, the sooner you will be approved for your first mortgage.
