First-time homebuyers naturally have many questions about the mortgage lending process. As a mortgage lender, you can educate these borrowers so they move through the lending process with confidence.
In this article, we’ll answer 20 of the most frequently asked questions about buying a home for the first time. You can use these FAQs to coach your applicants and bolster your borrower education. You can also share our First-Time Homebuyer Guide with them as an additional resource.
#1 What Credit Score Do I Need to Buy a House?
Most conventional loan programs have credit score requirements of 620 or above.[i] The minimum credit score requirements for government-backed loan programs are as follows:
- 500 – Federal Housing Administration (FHA) loans
- 580 – Veterans Administration (VA) loans
- 640 – U.S. Department of Agriculture (USDA) loans
Meeting your loan program’s minimum credit score requirements doesn’t guarantee your mortgage approval—many other factors are considered alongside your credit.
For more information on this topic, check out this article: What’s a Good Credit Score for a Mortgage?
#2 What Special Loans Are Available for First-Time Homebuyers?
First-time homebuyers may not have the same financial foundation as people who have already purchased homes and established equity. Fortunately, there are plenty of programs for first-timers to make their transition into the housing market a little easier.
Some of these programs allow for:
- Minimal to no down payments – Many first-time homebuyers assume that they need to save up a 20% down payment before they can buy their first home. However, first-time homebuyers can qualify for loans with down payments of 0%, 3%, or 3.5%, depending on the loan program they choose.
- Down payment assistance – First-time homebuyers also enjoy access to down payment assistance programs. These programs can take the form of grants, forgivable loans, deferred-payment loans, or low-interest loans.
- IRA or Roth IRA contributions – First-time homebuyers can withdraw up to $10,000 from their IRA or Roth IRA penalty-free to use toward their down payment. They just need to make sure they finalize their home purchase within 120 days of the withdrawal.[ii]
We outline even more details about first-time homebuyer programs in our First-Time Homebuyer Guide.
#3 How Can I Check My Credit Score?
Before you start applying for mortgages, it’s a good idea to check your credit report and credit score. This way, you can determine whether or not you need to increase your score before you start your home search.
You can view a free copy of your credit report from each of the credit bureaus (TransUnion, Equifax, or Experian) on AnnualCreditReport.com. You can check your credit score via:
- Your current creditors – If you currently have a credit card or loan, your lender may share your credit score within your online account or monthly statement.
- Free credit scoring websites – You can also check your credit score for free on certain websites. Credit Karma and Credit Sesame are two popular examples.
- Your credit counselor – If you enroll in credit counseling, your credit counselor will pull your credit score so they can find out what steps you need to take to improve it.
- The credit bureaus – You can obtain your credit score directly from the credit bureaus by signing up for their consumer protection services. Experian’s service is free, while Equifax and TransUnion charge fees. Here are the links to these services:
It’s important to note that your consumer credit score and your mortgage credit score aren’t the same. They’re calculated using different algorithms.
As a consumer, you only have direct access to your consumer credit score. However, you can find out what your mortgage credit score is by applying for prequalification with a mortgage lender. They’ll pull your mortgage credit score during the prequalification process and outline the types of loan terms you currently qualify for, based on your creditworthiness.
#4 How Can I Improve My Credit Score Before Applying For a Mortgage?
You can increase your credit score over time by practicing the following credit management habits:
- Pay your bills on time
- Pay off outstanding late payments as soon as possible
- Pay off any accounts that have been sent to collections
- Pay down your credit card balances so they’re less than 30% of your total credit limit
- Don’t close old credit card accounts
- Don’t apply for new credit accounts (unless it’s absolutely necessary)
- Dispute any errors on your credit reports with the credit bureaus
If you commit to these practices, you may be able to increase your credit score within a few months. Just keep in mind that it can take years before you see a substantial boost in your credit score if you have serious negative marks on your credit report, such as bankruptcies or foreclosures.
This article explains how to boost your credit score quickly in more detail.
#5 What Factors Affect My Credit Score?
Your credit score is based on your credit activity, which is the information found within your credit reports. Credit scoring models input your credit activity into algorithms to generate your credit score.
There are many credit scoring models out there, though FICO is the most common.[iii] According to the FICO credit scoring model, these are the five factors that affect your credit score, along with their weighted percentages:[iv]
- 35% – Payment history analyzes how often you’ve paid your bills on time. Late payments and collection accounts can damage your payment history, leading to a lower credit score.
- 30% – Credit utilization looks at how much of your available credit limit you’re using. It’s calculated by dividing your combined credit balances by your total credit limit. If you want to maintain a high credit score, it’s important to keep your credit utilization below 30% at all times.
- 15% – Length of credit history is the length of time that you’ve had credit activity listed on your credit reports. It shows how long you’ve been using credit. A longer credit history can boost your credit score, since it shows that you have more borrowing experience under your belt.
- 10% – New credit inquiries show up on your credit report when you formally apply for new loans or credit cards. Since new credit inquiries indicate that you need to borrow money, they can decrease your credit score by a few points temporarily.
- 10% – Credit mix analyzes the types of credit accounts you’ve used so far. Gaining experience with both revolving credit accounts (credit cards, lines of credit, etc.) and installment loans can help you achieve an optimal credit mix.
Check out this article to discover how the five C’s of credit (character, capacity, capital, collateral, and conditions) can affect your credit score.
#6 How Much Will My Credit Score Affect My Mortgage Interest Rate?
Your credit score is one of the main factors used to determine your mortgage interest rate. Having a high credit score can set you up to qualify for a lower mortgage interest rate and save a lot of money over time.
Lenders typically categorize borrowers’ credit scores into 20-point ranges. Your interest rate will be adjusted according to the range your credit score falls into.
#7 What is a Credit Report, and How Can I Get a Copy?
Your credit report contains information about your credit activity, including:[v]
- Recent credit inquiries
- Current credit accounts
- Creditors’ names
- Date of account opening and closure
- Types of credit accounts (mortgages, credit cards, student loans, etc.)
- Credit limits
- Account balances
- Payment history
- Liens, foreclosures, and bankruptcies
- Civil suits and judgments
- Overdue child support
You have a different credit report from each of the credit bureaus. Since some lenders don’t report to all three credit bureaus, each of your credit reports may contain slightly different information.
Your credit reports are important because they’re used to calculate your credit score. If their data is inaccurate, it can cause your credit score to be lower than it should be. You can check your credit report from each of the credit bureaus for free once every 12 months on AnnualCreditReport.com.
#8 What is a Credit Utilization Ratio, and How Does it Affect My Credit Score?
Your credit utilization ratio is the percentage of your total credit limit that you’re currently using. It’s calculated by dividing your revolving credit balances by your total credit limit. For example, let’s say you have a credit card with a balance of $250 and a credit limit of $1,000. In this case, your credit utilization ratio would be 25% ($250 / $1,000 X 100%).
Credit utilization is an important factor that’s used to determine your credit score. Maintaining a low credit utilization ratio shows lenders that you don’t rely too heavily on credit to get by or spend beyond your means. In turn, lenders are more likely to approve you for new credit accounts.
If you want to earn a good credit score, you should strive to keep your credit utilization ratio below 30%.[vi] If you want to earn an excellent credit score, keeping it below 10% is even better. You can reduce your credit utilization ratio by paying down your revolving balances and requesting credit limit increases.
#9 How Long Does it Take to Improve My Credit Score?
The time it takes to achieve your desired credit score improvement can depend on a variety of factors, including:
- Your length of credit history – If you have little to no credit history, establishing a decent credit score can happen over the course of a few months. You just need to make sure that you make all of your payments on time and keep your balances low. In contrast, if you have years of negative credit history listed under your name, it may take several years to reverse the damage to your credit score.
- Your quality of credit history – Some negative marks can take longer to recover from than others. According to research done by FICO, the average time it takes to bring your score back up after these negative marks is as follows:[vii]
- Bankruptcy – 6+ years
- Foreclosure – 3 years
- Missed payment – 18 months
- Late mortgage payment – 9 months
- Closing of a credit card account – 3 months
- Maxed out credit card balance – 3 months
- New credit inquiry – 3 months
- Your commitment to improvement – No matter what credit score you’re starting with, you’ll raise it faster if you dedicate yourself to practicing optimal credit management habits, such as making all of your payments on time, paying off late payments ASAP, maintaining low balances, and avoiding unnecessary credit inquiries.
- The passage of time – Negative marks have less of an impact on your credit score as time goes on. As a result, your credit score will naturally increase over time, as long as you don’t incur any more negative marks.
#10 What is a Debt-to-Income Ratio (DTI), And How Does it Affect My Ability to Get a Mortgage?
Your DTI is calculated by dividing your monthly debts by your gross monthly income and multiplying it by 100%. There are two types of DTIs that mortgage lenders look at:
- Front-end DTI – This DTI only considers your projected housing-related debts, including your new mortgage payment, proper taxes, private mortgage insurance, etc.
- Back-end DTI – This DTI takes into account all of your debts, including monthly credit card payments, auto loans, student loans, child support, and more.
Most mortgage lenders only accept applicants with maximum front-end DTIs of up to 36% and back-end DTIs of up to 45%, though specific DTI requirements can differ across lenders and loan programs.[viii]
If your DTI is too high, you’ll need to pay down a portion of your debt before applying for a mortgage. As a bonus, reducing your debt can also have a positive impact on your credit score.
#11 Should I Pay Off All of My Debt Before Applying For a Mortgage?
If you have a lot of debt, your DTI may disqualify you from getting approved for a mortgage. Thus, paying down your debt and applying with a lower DTI can help you get approved. It can also set you up to obtain a lower interest rate and better loan terms.
However, you don’t necessarily need to pay off all of your debt to pursue homeownership. As long as your debt is manageable when you factor in your new mortgage payment, you can apply for a home.
#12 How Long Does Negative Information Stay on My Credit Report?
Negative credit report information can drag down your credit score for up to ten years. Here’s how long it takes for the following derogatory marks to fall off your credit report:[ix]
- Hard credit inquiries – 2 years
- Late payments – 7 years
- Collection accounts – 7 years
- Charge-offs – 7 years
- Chapter 13 bankruptcy – 7 years
- Chapter 7, 11, and 12 bankruptcies – 10 years
- Foreclosure – 7 years
- Civil suits and judgments – 7 years
While these negative marks can show up on your credit reports for several years, their impact on your credit score typically wanes as time goes on.
We go into further detail on the impact of collections here.
#13 Can I Get a Mortgage With No Credit History?
Qualifying for a mortgage without any credit history can be challenging. If you can, it’s better to build your credit first. Doing so will set you up to qualify for more loan options with better rates and terms. You can find out how to build your credit from scratch in this article.
If you want to apply for a mortgage before you build a credit history, you may improve your chances by:
- Applying with a co-signer – A co-signer is someone who signs your mortgage application with you. In doing so, they agree to take over your loan payments if you can’t make them on time. While your mortgage can impact their credit history and credit score, they won’t be listed on your home’s title.
- Making a substantial down payment – Some mortgage programs only require down payments of 0% to 3.5%, but the chances of qualifying for one of these without a credit history are slim. By saving up a larger down payment, you may be able to find a lender that’s willing to approve your application.
- Seeking out a lender that offers manual underwriting – Many lenders use automated underwriting programs to evaluate applicants’ risk. These programs often reject borrowers who don’t have credit scores.However, lenders who use manual underwriting may be more willing to overlook your lack of credit history if you bring other worthwhile qualities to the table, such as a steady income, ample assets, minimal debt, and high down payment.
- Opting for a flexible loan program – Some loan programs are more suitable for applicants without any credit history than others. Generally, government-backed loans have more flexible eligibility requirements.
#14 Can I Get a Mortgage With a Co-Signer if I Have Bad Credit?
A co-signer is someone who applies for your mortgage with you to help you get approved. Your lender will consider their good credit when evaluating your application. If you don’t make your mortgage payments on time, your lender can look to your co-signer to make them on your behalf. Your mortgage will also be listed on your co-signer’s credit report, potentially putting their credit at risk.
Applying for a mortgage with a co-signer may strengthen your application if you have a low credit score, but it’s unlikely. That’s because you still need to meet your loan program’s minimum credit score requirements. What’s more, lenders typically base their mortgage decisions on the applicant with the lower credit score.
For this reason, it’s a smart move to improve your credit score before you apply for a mortgage. Doing so can save you a lot of money over time. It also prevents you from putting someone else’s good credit on the line for your home purchase.
#15 Should I Use a Credit Repair Service?
Financial experts recommend against using credit repair services. Some have a reputation for being scams.
Credit repair companies try to boost your credit score by disputing old or inaccurate information on your credit reports on your behalf. They charge a monthly fee for this service, which can range from $20 to $150.[x] However, they can’t guarantee any results.
While using a credit repair company can be convenient, it’s not necessary. You can dispute errors on your credit report on your own for free. Your mortgage lender may also be able to provide you with personalized credit score improvement tips.
#16 What Should I Do if I Find Errors on My Credit Report?
The Federal Trade Commission (FTC) estimates that one in five people have at least one error on their credit reports.[xi] Thus, it’s a good idea to review your credit report information every once in a while to ensure its accuracy.
If you find any errors, you can dispute them with the credit bureau that generated the report. Make sure to include an explanation of why you believe the information is inaccurate and provide documents to support your claims.
You can submit your dispute over the phone, online, or by mail. Here’s the contact information for each of the major credit bureaus:
- Phone – (866) 349-5191
- Online – equifax.com/personal/credit-report-services/credit-dispute/
- Mail – Fill out this form and send it to:
Equifax Information Services LLC
O. Box 740256
Atlanta, GA 30348
- Phone – (888) 397-3742
- Online – experian.com/disputes/main.html
- Mail – Send your dispute to:
P.O. Box 4500
Allen, TX 75013
- Phone – (800) 916-8800
- Online – https://dispute.transunion.com
- Mail – Send this form to:
Consumer Dispute Center
P.O. Box 2000
Chester, PA 19016
Once you’ve filed your dispute, the credit bureaus are legally required to investigate it within 30 days. After that, they have five days to inform you of their decision.[xii]
#17 How Many Credit Inquiries Can I Have Before It Affects My Credit Score?
Credit inquiries take place when someone requests to pull your credit reports for review. There are two types of credit inquiries:
- Hard inquiries take place when you formally apply for a loan or credit card. They’re also used during loan pre-approval and rental property applications. Since new credit inquiries account for 10% of your FICO credit score, hard inquiries can lower your credit score by a few points. Luckily, their negative impact typically only lasts a few months.
- Soft inquiries don’t impact your credit score at all. These harmless credit inquiries take place when:
- You check your own credit score
- You apply for prequalification with a lender
- Your employer checks your credit
- A lender “pre-approves” you for a credit offer without you knowing
- A lender you already have an account with monitors your credit
If you’re shopping around for the best loan or credit card, you can minimize the impact of multiple hard inquiries by incurring all of them within the same 45-day period.[xiii] Doing so makes it so they’re counted as just one hard inquiry.
#18 How Much of a Down Payment Will I Need if I Have a Low Credit Score?
Many homebuyers assume they need to make a down payment of 20% to obtain a mortgage. However, this isn’t the case—you can obtain a mortgage with much lower down payments than that.
Your credit score and loan program will both play a role in your required down payment amount. Here are the minimum down payment requirements for borrowers with low credit scores:[xiv]
- Conventional – To qualify for a conventional loan, you typically need a credit score of 620. The minimum down payment requirements for this loan program are 3%.
- FHA – You may be able to qualify for an FHA loan with a credit score as low as 500. However, you’ll need to put down at least 10%. If your credit score is above 580, that down payment requirement drops to just 3.5%.
- VA – VA loans have credit score minimums of 580. As long as you meet this requirement, you don’t need to make any down payment at all.
- USDA – Like VA loans, USDA loans can be obtained without a down payment. However, their credit score requirements are slightly higher—you’ll need a 640 or above to qualify.
#19 How Long Should I Wait After Bankruptcy or Foreclosure Before Applying For a Mortgage?
Bankruptcies and foreclosures are two types of negative marks that can seriously affect your credit score. They can decrease it by up to 200 points.[xv] This damage will only resolve completely once the bankruptcy or foreclosure falls off your credit report, which can take up to 7 to 10 years.
You may be wondering if you can purchase a home before this time is up. You can—you just need to wait for your bankruptcy or foreclosure’s waiting period to be over. With bankruptcies, this waiting period begins once your bankruptcy is discharged.
Here are the required waiting periods according to each loan program:[xvi]
- Chapter 7 bankruptcy:
- FHA – 2 years
- VA – 2 years
- USDA – 3 years
- Conventional — 4 years
- Chapter 13 bankruptcy:
- FHA – None
- VA – None
- USDA – 1 year
- Conventional – 2 years (or 4 years if you don’t follow your bankruptcy plan properly)
- FHA – 3 years
- VA – 2 years
- USDA – 3 years
- Conventional – 7 years (or 3 years if you can prove extenuating circumstances, such as divorce, costly medical bills from a severe illness, or a job layoff)
- Chapter 7 bankruptcy:
#20 What Should I Do if I Have a Lot of Student Loan Debt?
Since student loans can push your DTI past the acceptable limits, they can make it harder to qualify for a mortgage. Even so, you may still be able to buy a home with high student loan debt if you:
- Apply with an excellent credit score
- Pay off other debt balances
- Increase your gross monthly income
- Lower your student loan payments through refinancing, consolidation, or enrollment in
an income-based repayment program[xviii]
Before you apply for a mortgage, make sure you can comfortably afford a mortgage payment on top of your monthly student loan payments. If it seems like a stretch, you may want to hold off on homeownership until you pay down your student loan debt.
Certified Credit: Grow Your Mortgage Lending Business Today
At Certified Credit, we believe that educating your borrowers is one of the most powerful marketing tools at your disposal. By providing them with the information they need to make savvy financial decisions, you can earn their trust and build their confidence in the home-buying process.
Hopefully, this cheat sheet covered the questions you receive most often from your mortgage applicants.
In addition to these helpful resources, we also develop plenty of innovative products and services for mortgage lenders. Our offerings include:
- Affordable credit reports
- Credit score improvement tools
- Automated lead generation and borrower retention tools
- Automated prequalification
- Automated verification of income and employment
- Automated undisclosed debt monitoring
- Flood zone determinations
- Fraud and risk support
- Settlement services
Schedule a credit consultation with our team today to learn more.
[i] NerdWallet. What Credit Score Do You Need to Buy a House?
[ii] Investopedia. Can You Use Your IRA to Buy a House?
[iii] Investopedia. FICO Credit Scores Explained.
[iv] FICO. What’s in my FICO® Scores?
[v] Consumer Financial Protection Bureau. What is a credit report?
[vi] NerdWallet. 30% Credit Utilization Rule: Truth or Myth?
[vii] FICO. Research Looks at How Mortgage Delinquencies Affect Scores.
[viii] Credible. How Your Debt-to-Income Ratio Can Affect Your Mortgage.
[ix] NerdWallet. How Long Do Derogatory Marks Stay on Your Credit?
[x] Investopedia. How Much Does Credit Repair Cost?
[xi] FTC. In FTC Study, Five Percent of Consumers Had Errors on Their Credit Reports That Could Result in Less Favorable Terms for Loans.
[xii] Consumer Financial Protection Bureau. If a credit reporting error is corrected, how long will it take before I find out the results?
[xiii] Equifax. Understanding Hard Inquiries on Your Credit Report.
[xiv] The Motley Fool. Mortgage Types: Conventional, FHA, USDA, VA, Jumbo & More.
[xv] Forbes. 7 Easy Ways To Rebuild Your Credit After Bankruptcy.
[xvi] Rocket Mortgage. Buying A House After Bankruptcy: What You Need To Know.
[xvii] Lending Tree. What to Know About Mortgage Default.
[xviii] Lending Tree. Is the Income-Based Repayment Plan Right for Your Student Loans?