How to repair credit for first-time home buyers

When you apply for a mortgage, your credit score is one of the most important factors in determining whether you qualify for a loan and the interest rate the lender will charge.

If your credit score isn’t perfect, you’re not alone. Being worried about your credit is a common thing for first-time buyers, and there are things you can do to boost your credit score, giving you more options when it comes to getting a loan and lowering your rate.

Understanding credit scores

Credit scores are a numerical representation of how risky a borrower is to lenders. Lenders look at credit scores to get a quick idea of whether someone is likely to repay a loan and use that information to decide whether to approve loan applications and how much interest to charge.

How are credit scores calculated?

There are many different credit score formulas, but FICO^® Scores, among the most used, range from a low of 300 to a high of 850, with higher rates being better. The higher your score, the better your odds of getting a mortgage at a low rate.

There isn’t a set answer for what constitutes a good score, but lenders often use these approximate ranges.

• 800+ Excellent (or Exceptional)
• 740 - 799 Very good
• 670 - 739 Good
• 580 - 669 Fair
• 579 - 330 Poor

As of 2024, the average score is 715, which is good but not exceptional. If you have a credit score around that level, you should have no issues with getting a mortgage.

Credit scores under 580 are considered poor, which means that getting a loan could be tricky. Lenders usually consider borrowers with poor scores to be “subprime,” so they’ll face tougher application processes and higher interest rates because of their higher risks as borrowers.

Your credit score is calculated using details from your credit history. If you use debt well and pay your bills, your score will tend to rise. Missing payments will hurt your score.

The breakdown of how your score is calculated is:

• Payment history (35% of the score)
• Amounts owed (30% of the score)
• Length of credit history (15% of the score)
• New credit (10% of the score)
• Credit mix (10% of the score)

How a lower credit score affects your mortgage application

Having a lower credit score influences your mortgage application in two main ways.

One is that poor credit can make it difficult to qualify for a mortgage in the first place. Conventional loans have a minimum credit score of 620. If you have a lower score, you won’t be able to get a conventional loan, but you may be able to qualify for an FHA loan with its minimum score of 500.

In short, lower scores limit your loan options and could stop you from buying a house with a mortgage.

A lower score also tends to lead to a higher interest rate. That means a higher monthly payment, which can make your mortgage harder to afford.

Exploring loan options

If you want to buy a home, taking the time to improve your credit score is a good idea. It’ll make it easier to get a loan and secure a lower rate. However, repairing your credit can take time, and you may not have the luxury of waiting.

In that case, there are some options for people who may not have stellar credit, such as FHA, VA, and USDA loans. Keep in mind that Rocket Mortgage^® does not offer USDA loans but does offer FHA and VA loans.

FHA loans for home buyers with low credit scores

A Federal Housing Administration (FHA) loan is a government-backed mortgage. These loans come from regular lenders but are partially insured by the FHA, which reduces the risk that lenders face.

That means that lenders can offer loans to people with lower credit scores. The minimum score to qualify is 500. Down payment requirements are also low at just 3.5%.

There are some drawbacks, such as limits on the amount you can borrow and having to pay a mortgage insurance premium that can be hard to eliminate, but FHA loans are a good option for people with lower scores who want to buy a home.

VA loans for eligible service members

Another option if you have poor credit is a Veterans Affairs (VA) loan. VA loans are only available for eligible servicemembers, veterans, and their qualifying surviving spouses, but if you’re eligible, this program offers many benefits.

For example, VA loans have no down payment requirements, limited closing costs, no PMI payments, and competitive rates.

The VA also does not set a minimum credit score, but most lenders will have some requirements. That requirement is usually lower than the minimum for conventional loans due to the insurance offered by the VA.

USDA loans for rural property buyers

If you’re buying a home in a rural area, you may be able to apply for a U.S. Department of Agriculture (USDA) loan. While Rocket Mortgage doesn’t offer USDA loans, they can be a great fit if you’re looking in qualifying areas.

The USDA does not set minimum credit score requirements, but borrowers must be able to show that they can handle and manage the debt. Generally, these loans come from other lenders, not the USDA itself, so those lenders may set their own requirements.

Other key details of USDA loans include:

• Applicants must make no more than 115% of the median household income
• Closing costs of 2% - 6% of the loan amount
• Only for principal residence
• No down payment required
• Competitive rates

How to repair your credit score

If you’re hoping to buy a home and want to repair your credit, you’re already starting off on the right foot. While fixing your credit can take time, use these tips to get the best results.

Checking and disputing credit score inaccuracies

The most important thing to do when trying to improve your credit is to check your credit score. Knowing what your credit report looks like and what’s dragging your score down will give you an idea of what you should be working on.

There are lots of ways to check your credit. For example, the Rocket Money® app will let you get a look at your credit report to see what’s affecting your score. You can also get one free copy from each credit bureau once per year at AnnualCreditReport.com.

While examining your report, keep an eye out for any errors or accounts in your report that don’t belong to you. If you find errors, dispute them with the credit agency and get them removed. You might see your score rise quickly if you remove incorrect, negative information.

Each bureau’s process for disputing errors is different, but it usually starts with visiting the credit bureau’s website and filling out a dispute form.

Do your research when considering credit repair services

Some companies advertise themselves as credit repair services. They claim to be able to help boost your score quickly, making it easy to qualify for a mortgage. Of course, these services come at a fee.

While these businesses can be legitimate, many of them are scams looking to take your money without doing much to help your credit score, so do your research if you’re thinking about working with one of these companies.

The Credit Repair Organizations Act governs these businesses, requiring that they provide proper disclosures to consumers and stopping them from demanding advance payment. If a credit repair company isn’t giving you enough info about how they work or demands payment right now for services rendered at a future date, look elsewhere.

Establishing and maintaining good credit habits

Building and improving your credit score is a long game, so the best thing you can do to fix your score is to establish and maintain good habits.

Recall that the most important factor in determining your credit score is your payment history, followed by the amount you owe.

That means that if you only borrow money when you need to, try to keep your balances low, and always pay your bills on time, your score is almost bound to rise.

Avoid using your credit card for purchases unless you can afford to pay the bill in full when it comes, and set up automatic payments for all of your accounts. By doing those two things, you’ll be on the path toward a good credit score.

FAQ: Repairing credit as a first-time home buyer

If you’re looking to buy your first home, understanding how your credit works and what you can do to repair your score can help you get a great loan.

How do you fix your credit to buy a house?

To fix your credit score, examine your credit report and get any errors removed from it. Then, do your best to pay down any existing debts you have and try to build a history of on-time payments.

How long after repairing your credit can you buy a house?

You can buy a home as soon as you’ve successfully improved your credit score. How long it takes to repair your credit will depend on why your score is low. For example, it can take a year or more for it to improve after a missed payment.

How do you increase your credit score quickly?

The best way to boost your credit score quickly is to pay down your existing debts. The amount you owe makes up almost one-third of your credit score, so paying off debts can give your score a big boost.

What habits tend to lower your credit score?

Your payment history and the amount you owe make up nearly two-thirds of your credit score. That means that missing monthly payments and carrying a large amount of debt will both tend to damage your credit.

What is the average US credit score?

As of 2024, the average credit score in the United States is 715.

The bottom line: Repairing your credit score takes time

Your credit score is a key factor when it comes to qualifying for a mortgage and determining how much you’ll pay for that loan. If you want to buy a home, it’s in your best interest to work to improve your credit. The best way to do that is to establish good habits like paying down your debt, making every monthly payment before the due date and removing any errors from your credit.

Once you’re ready to start shopping for a home, you can begin the mortgage process by getting preapproved with Rocket Mortgage.