This is part of a new series in which we answered frequently asked questions from first-time buyers across the U.S. Today’s question comes from Rasheeda in Lansing, who asks: “What is the minimum credit score for a first-time home buyer 2017?”
Actually, there is no minimum credit score that applies to all first-time buyers across the board. Credit requirements for mortgage loans can vary from one program to the next. Additionally, different lenders have different standards with regard to credit scores needed for loan approval.
Minimum Credit Score for First-Time Home Buyers
Ellie Mae is a software company that serves the mortgage industry. The company also produces an “origination insight report” that tells us a lot about current lending trends across the country. It also gives us some insight into the minimum credit score for first-time home buyers in 2017.
In June 2017, the company’s report offered the following insight into credit scores:
- For all of the purchase loans that actually closed, 99.5% of them had FICO credit scores of 600 or higher. That doesn’t necessarily mean you need a score of 600 at a minimum. But it does show that most closed loans fall into that bracket. So it’s an indicator of where the bar set.
- For FHA-insured mortgage loans, only 5.46% of closed loans had a FICO credit score between 500 and 599. All other borrowers who closed that month had scores of 600 or higher. (There’s that number again.)
- For conventional home loans, 95.61% of borrowers had FICO credit scores of 650 or above. Another 3.44% of loans had scores between 600 and 649. Less than 1% had fell below 600, which is also very telling.
So those are the latest trends, according to Ellie Mae’s most recent report. Here’s how we might interpret this data to determine the minimum credit score for first-time home buyers:
- Based on this insight, it seems that borrowers with credit scores of 650 or higher are in a pretty good position to qualify for any kind of mortgage loan — conventional or FHA.
- First-time home buyers with scores of 600 to 649 are still in a pretty good position, but they might have better luck with the FHA loan program.
- Buyers with FICO credit scores below 600 might find it hard to qualify for a conventional mortgage loan (one that is not guaranteed or insured by the government). For many of these borrowers, the FHA loan program is a fallback option because it tends to allow for lower scores.
Your Ability to Repay Is Also a Key Factor
While there is no single minimum credit score for all first-time home buyers, it seems that a clear distinction is set somewhere around the upper 500s or 600. If we were to settle on a single number based on data that are currently available, I would say a FICO score of 600 or higher would put you in a good position to qualify for a loan these days.
Just remember that your credit situation is only one aspect of a broader underwriting and approval process. Your ability to repay your loan is also a critical factor, and it is sometimes “outweighs” a person’s credit score.
For obvious reasons, mortgage lenders want to make sure that you have sufficient income to repay your loan. Specifically, they want to ensure that you can manage your monthly payments along with all of your other recurring monthly debts. In order to determine this, they will look at something known as the debt-to-income ratio, or DTI.
The debt-to-income ratio is exactly what it sounds like. It is a number, usually expressed as a percentage, that compares the amount of money you earn each month to the amount you pay to cover your debts. As with credit scores, there is no single minimum DTI ratio for first-time home buyers. It can vary based on the type of loan you are using and other factors.
Generally speaking, however, most mortgage lenders today prefer to see a total debt-to-income ratio no higher than 50%. Some set the bar even lower than that, at around 43% to 45%. But again, these numbers are not necessarily written in stone.
Disclaimer: This article addresses the minimum credit score needed for first-time buyers in 2017. We have provided a ballpark range based on data published by Ellie Mae. But this article is by no means a definitive source on credit guidelines within the mortgage industry. It is meant to give you a general idea as to where the minimum credit score falls for home buyers. The only way to find out for sure if you qualify for a mortgage loan is to speak to a lender.