What is The Minimum Credit Score Needed to Buy Your First House

What is The Minimum Credit Score Needed to Buy Your First House

Buying the first house is a big move for anyone unfamiliar and without prior knowledge of mortgage types, credit scores, and other financial procedures. The best way to buy a house is to find out the needed credit score for the perfect mortgage and consistently work towards it.

If you’re wondering what is the minimum credit score or the minimum down payment needed to buy your first house, you’re in luck! The answer might surprise you.


What credit score do you need to buy a house in 2020?

Optimistically speaking, having a credit score of 740 is ideal for getting favorable terms like lower interest, bigger loan limit, and also faster approval.

The minimum credit score, on the other hand, would be 580 for a basic FHA loan. Juggling from the minimum to the ideal 740 might just give you the nudge needed to boost your credit score even further before taking a mortgage.


What is the easiest mortgage to qualify for?

If you’re looking for the fastest approving mortgage, this really depends on your available credit score or the type of mortgage provider you choose to get your loan from.

When it comes to the minimum credit score requirement, the FHA loan would be the easiest mortgage to qualify for. However, the low requirements come with certain limitations like the loan only being applicable for basic housing and not for rental properties, primary residences, and vacation homes.


The three mortgage types

There are three mortgage types to choose from but one of them is a special mortgage that can only be approved under special circumstances.

There are three different mortgages with different credit score requirements.

  • Conventional mortgages
  • FHA Loan
  • VA Home Loan


Conventional mortgages

Just to be clear, the government does not secure conventional mortgages or conventional loans. These types of mortgages are given by private lenders but there is an exception.

Both the Fannie Mae and Freddie Mac are government-sponsored private lenders so if you’re for a little more security with a conventional mortgage, pick one of both.

Credit Score Needed For Home Loan

Here are a few things to keep in mind when choosing a conventional mortgage:

  1. Low down payment and low-interest rate
  2. 15 to 30-year mortgage terms
  3. FICO®Scores of 620 required

Key takeaway: Conventional mortgages can be used for properties aside from housing. This includes rental property, primary residence, or even a vacation home.


FHA Loans

FHA loans, otherwise known as Federal Housing Administration loans, were created for the general public as the government’s way to provide a bridge between those with poor or no credit score and the housing they deserve.

This type of loan is insured and less risky. They are also much easier to qualify for compared to conventional loans. 

Here are a few things to know about FHA loans:

  1. Down payments as low as 3.5%
  2. Helps current homeowners’ problems on their existing mortgage
  3. FICO®Scores of 580 required

Note: If you’re wondering what type of problems current homeowners might be experiencing, this could refer to additional renovations or extensions.

Here are a few things to watch out for:

  1. Different lenders might have different credit score requirements
  2. Standard FHA loans require a minimum of one credit score
  3. Applying with your spouse means the lower credit score will be the determinant

Key takeaway: The advantage of an FHA loan is that despite a high debt-to-income ratio or even no credit at all, you might still be able to apply for a mortgage.


VA Home Loans

The U.S. Department of Veterans Affairs insures VA Home Loans and are regarded as the loans with generally the best deals on the list. Although this loan has amazing benefits, there are only two ways to get it.

Here are a few advantages of this loan:

  1. No downpayment required
  2. Lower average interests
  3. Available to people with low credit scores
  4. No charge for private mortgage insurance

Here are a few things to watch out for:

  1. Private lenders may vary in minimum credit score requirements
  2. May include a one-time fee
  3. To hasten the process, you must have a FICO®Score of 620 onwards

Key takeaway: In order to apply for this loan, you must have served or are currently serving the U.S. Military, the Military Reserve, or the National Guard. The other way to get this loan is if you are a spouse of a deceased military member.


How can I improve my credit score?

Good news! If you aren’t too happy with your credit report, there are a few ways to increase your credit score.

If you’ve already made the decision to buy a house, you’ll have to move fast and try the following methods for a quick fix.


Clarify credit report

Check your credit report for any mistakes that could be the reason for a lower credit score. If you see issues, you may want to dispute the inaccuracies with the bureau associated with the error.


Ask a family member to help you out

If you have a family member with a good credit standing and they agree to add you as an authorized user of their credit card, you can use this as the measurement of your credit score.

Oh yeah, if the primary owner of the card makes a payment, your credit score gradually goes up as well!

If you aren’t in too much of a hurry and don’t mind gradually scaling up your credit score, there are long term fixes that can help you solidify your growing credit score.


Pay bills on time

A simple on-time bill payment could actually boost your credit score after a while. If you have a difficult time paying your monthly dues on time, try setting a reminder on your phone or calendar, or if it is available, set up autopay so you don’t even have to think about it! 


Fix your credit utilization ratio

A credit utilization ratio talks about the amount of debt you’ve incurred in comparison to your credit limit. 

Slowly paying off your debt and leaving more credit room untouched lets you gradually build a cleaner credit score.


If you’re aiming for just the minimum credit score to buy your first house, you’ll need to have at least 580 to qualify for an FHA loan. If you lack in the scoring department, don’t worry; apply the short term and long term techniques to fix your credit and work towards your first house.

Build your credit score just how you would your first house. Planned. Prepared. Patient.

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What is A Revolving Line of Credit

A revolving line of credit is basically an agreement between an individual or an entity and a bank or other financial institutions to borrow short-term money for a maximum fixed amount that is renewed when the balance is paid off or paid down. The bank will initiate a commitment fee the borrower must pay when opening the credit line.


When a borrower draws on a line of credit, interest expenses are charged. If charges are carried forward from month to month, then carry-forward charges are incurred as well. Revolving lines of credit are similar to personal credit cards, but they usually require some sort of collateral.

For individuals, this collateral may be an existing home or personal property. A home equity loan, aka HELOC, is an example of a personal revolving line of credit. The issuing agency uses your home as security provided you have a sufficient amount of equity in it, to grant you the credit line. If you default on your revolving credit, the house can be used as collateral to recover the value of the HELOC.


For businesses, revolving lines of credit are granted by creditors with inventory or accounts receivable used as collateral a majority of the time. If a company defaults on the revolving line of credit, the value of the loan can be recovered through the value of the inventory or accounts receivable.


Why Do Revolving Lines Of Credit Exist


Most of the time a person or company seeks a revolving line of credit need it to make up for shortfalls in revenue on a monthly basis. They may have Accounts Receivable outstanding or an influx of inventory. A revolving line of credit is a great way to add stability to any business that experiences a normal amount of financial fluctuation or is experiencing periods of growth that requires increased funding. Some take out credit cards to increase their credit score, for the points and rewards or to supplement their income. (see this article about How Many Credit Cards Should I have)


revolving creditFor individuals, revolving lines of credit such as home equity loans are a great way to consolidate debt at a lower interest rate than their current credit card companies are providing, or for making needed home improvements to maintain or increase the market value of a home. Homeowners often don’t realize the amount of money needed to keep a home in good condition and market ready. A HELOC is one way to mitigate this problem, given the right real estate market is in place.


Advantages Of A Revolving Line Of Credit

The nice thing about these types of loans is once you’ve been approved you never have to reapply. You won’t have to make payments until you actually draw money from the line, and you can repay it and reborrow it over and over again for usually up to about ten years with the option to renew.  Personal lines of credit most often fall between $5,000 and $200,000 for average consumers.


For individuals seeking HELOCs, the amount you’ll be able to borrow will depend heavily on the value of your home, your credit rating, and the credit rating of any co-borrowers. If you have an established credit rating that is ranked well, you may be able to borrow up to 85% of the appraisal value of your home minus how much you owe on the property.  Just be careful to read the terms of the loan, as many can have larger payments later in the loan repayment cycle, which can catch you by surprise.


Unsecured Lines Of Credit

There are also unsecured revolving lines of credit, similar to credit cards. These types of loans do not require collateral such as a piece of home property in a HELOC or an amount of inventory in a business line of credit. Credit cards are considered as unsecured revolving lines of credit. 


With unsecured lines of credit, limits are typically a lot lower than secured versions, and the interest rate is considerably higher. This is because lenders are incurring more risk with unsecured revolving lines, so the money they make must be more secure.


Costs Involved

revolving line of credit

The fees and costs involved in obtaining a revolving line of credit vary significantly from lender to lender depending on the specific line of credit you’re looking to open. You’ll be charged a regular interest rate that will range depending on your credit score and whether or not your revolving line of credit is secured or unsecured.


Some interest rates fluctuate depending on the prime rate. If you obtain a credit line with an APR of prime plus 2 points, the amount of interest you pay will vary with how much the prime rate varies. Make sure your loan has a cap on how high of an APR you have to pay to protect you from potentially soaring APRs.


For home equity loans, in particular, the fees incurred can be numerous. You’ll most likely need to pay an application fee of between $75 and $300. You may also have to pay to have your home appraised, which can cost anywhere between $150 and $450. You may have to pay points depending on your credit score, each one of which is worth one percent of the credit limit of the credit line. Finally, you may incur closing costs fees similar to those you paid when purchasing your home, which may vary between $75 and $350.


Hidden Fees

Some plans also charge transaction fees each time you make a withdrawal, or an annual maintenance fee to maintain the line of credit. While not every revolving line of credit has all of these fees, most contain at least a few. Make sure you take the time to read over all of the fees and terms involved in a revolving line of credit and don’t be afraid to shop around. Be aware of all the fees, and make sure you’re only borrowing what you need so you won’t be tempted by additional funds that you really don’t require.  


The best way to use revolving lines of credit is to help your business or the value of your home grow. Using a revolving line of credit to reinvest in your business or your personal ventures will help to increase the value of these entities and increase your financial security in the long run.


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