What Credit Score is Needed for First Time Home Buyers?

If you’re thinking of buying a home for the first time, you may be wondering what credit score you need to get a mortgage. Credit score is one of the criteria for getting a home mortgage; but it is an important one. Credit score requirements are dependent on the type of loan programs and it is best to look at the current first time home buyer loan programs to get the current minimum scores, which will change based on the average credit score of an average family, which is driven by the changing economic conditions. As you are looking at the best loan programs for first time home buyers, start increasing your credit score fast. You can download our e-book on increasing credit score by 30 points in 30 days. Let’s now look at some facts about credit scores during the mortgage application process.

In fact, before the housing market crashed, it was far easier for the average person to get a loan since credit standards were very low (or nonexistent!) and the subprime loan market was nearly unregulated.

However, banks and lenders have tightened up their lending standards since then (which is a good thing), including the credit score you need to qualify for a mortgage.

So let’s look at some data that will help us define what score you need to get a mortgage loan approved:

What credit scores are being turned down for loans?

To help gauge what credit score you realistically need to buy a home (and get a mortgage), we can also check the average credit score for loans that were actually denied.

In fact, the average credit score has dropped to 645 in 2017, a decrease from a declined loan average of 675 in 2016. (The number and percentage of declined loans has also dropped.)

According to FICO, the average score for denied FHA purchase applications was 636.

For VA loans, the average FICO score for denied purchase loan applications is 642.

Crunching the credit score data for closed loans

We can also ascertain some data about not just guidelines, but information from actual closed loans.

Mortgage servicer Ellie Mae is a great source for that information, since about a quarter of all loan applications in the U.S. pass through that agency.

After tracking 3.7 million loan applications, Ellie Mae found that the average FICO score for approved/closed FHA loan applications is 645, down from 689 in 2015.

Approved conventional loans have an average score of 719, down from 731 a year ago and 755 in 2015.

For VA loans, the average approved purchase loan has a 707 FICO now.

Credit score minimums by loan type

The easiest way to figure out what credit score you might need to buy a house is to just open the “rulebook” for different loan types.

FHA loans have a minimum credit score requirement of 500 with a 10% downpayment.

But most FHA loans are approved with a score of 580 and up

VA Loans – 620+ credit score

USDA Loans – 640+ credit score

FHA 203K Loans – 620+ credit score

Conventional Loans – 620+ credit score

But that doesn’t mean you’ll be approved with that credit score!

Don’t get too excited if you have those minimum credit scores, because that doesn’t mean you’ll be automatically approved.

That’s because individual lenders apply what’s called “mortgage overlays” which means they have more stringent credit standards than those programs dictate.

In fact, a recent study by Fannie Mae found that nearly two-thirds of mortgage lenders apply mortgage overlays these days, with 47% of lenders calling for higher credit score overlays.

For instance, FHA – the Federal Housing Administration – may only require a 500 credit score on paper, but the FHA also doesn’t lend any money or issue any loans! Instead, the FHA is a governmental agency that insures loans made by other lenders, and so we see it’s rare and difficult to get an FHA loan approved with a score under 580.

Remember that the lower your credit score, the more you can typically expect to pay for your mortgage interest rate. For instance, with FHA if your score is:

579 and lower score: If you get approved at all, your interest rate will probably be 2% higher than conventional rates.

580-619: Your interest rate will be up to 1% higher than the lowest rates available.

620-679: Your interest rate will only be bumped up slightly – probably by about .5%.

680+: Your rate probably won’t be affected at all, and with a 720 or 740 and up score, the best rates will be available.

What is the average credit score for mortgage holders, and homeowners?

To put it another way, people with mortgages have higher credit scores than the general public, as do homeowners. In fact, the average credit score among non-mortgage holders in the U.S. is 613, compared to 649 for FHA loan holders, and 652 for conventional real estate mortgagees.

So is YOUR credit score good enough to buy a house? Chances are that with our help and a few months, you’ll be in prime position to qualify for a great home loan and get the keys to a new house!