Many first-time home buyers assume the first step to home buying is the house hunt. Three or four bedrooms, a pool, ample square footage, or the garden of your dreams might top the list.
But before you dial up a real estate agent or plan a FSBO listing yourself, remember the first step of the homebuying process isn’t finding the house. It begins with securing financing, which is in turn influenced by your credit score.
When you’re ready to transition from browsing local listings to touring homes, securing a mortgage pre-approval is an essential first step to begin the homebuying process. It’s important to note that pre-approval is not the same as pre-qualification, which is only a surface-level estimate.
A pre-approval involves a lender verifying your income, debt, and credit history, and formally extending mortgage options to you. Why is this a non-negotiable first step in the home-buying process?
When you find a home and want to make an offer, the standard real estate contract includes a section specifically asking how you intend to finance the purchase and what loan vehicle you intend to use if you’re not paying cash.
Some sellers, or the seller's real estate agent, may ask to see your pre-approval letter attached to the offer for it to be considered. This pre-approval letter is proof that a lender has vetted your ability to execute financing and complete the home purchase. If there are competing offers in play, you may lose to another buyer if they have a pre-approval letter to pair with their offer and you do not.
While homes aren’t moving as quickly as they did in recent years, in many markets, homes are still going under contract rather quickly since home lending rates have shown some improvement. Without a pre-approval letter secured, some buyer’s agents may refuse to take you on as a client, and other selling agents will not schedule a showing to buyers without proof of financing. Both instances result in delays between looking at market listings and the ability to make an offer on a home.
A pre-approval letter provides clarity on how much home you can finance, it provides realistic sales parameters for your home search, and it can help prevent the frustration of looking at homes that are out of budget.
Pre-approvals are good for typically 60 to 90 days. Since lenders are taking a current snapshot of your financial health, they want to ensure that snapshot (i.e., creditworthiness and risk) is still accurate when you head to the closing table. If you're early in your PCS planning, you may want to wait until you are within three months of your expected purchase date to apply for pre-approval.
One of the most significant factors in securing pre-approval is your credit score.
Many new homebuyers wonder if there's a universal score required for homeownership. While there isn’t a singular universal credit score per se, the range where your credit score falls will impact available mortgage options, interest rates, and lending terms.
Many free monitoring services and banking apps provide a VantageScore to help you track general trends, but most mortgage lenders still rely on the FICO model, which ranges from 300 to 850. Because these two systems calculate risk slightly differently, the number you see on your phone may not perfectly align with the score a lender uses to determine loan terms.
The names floating around your credit reports can get confusing to distinguish. Equifax, Experian, and TransUnion are the bureaus, or databases, that track your credit behavior. On the other hand, FICO and VantageScore are the scoring models or algorithms used to produce a grade or credit score.
Your credit score dictates the cost of debt and the loans you qualify for. Lenders view your credit score as a measure of risk. A higher score signals a lower risk of default, which translates into a lower interest rate, and a lower credit score signals greater risk to a lender of potential default.
Even a slight difference in your score can move you into a different pricing tier. For example, the interest rate offered to someone with a 760 score will be significantly lower than the rate offered to someone with a 640. Over the life of a 30-year mortgage, that gap represents hundreds of thousands of dollars in interest.
Here is a sample $300,000 loan with different interest rates:
While it’s technically accurate that the Department of Veterans Affairs doesn't set a minimum credit score requirement for using the VA loan benefit, individual lending institutions (such as Bank of America, Wells Fargo, Navy Federal, etc.) apply an overlay. This sets a minimum credit score requirement based on the lender’s standards. In today’s market, most lenders look for a score of at least 620. With a more intensive underwriting process, some lenders will work with scores as low as 580.
VA loans are attractive to many military families and veterans, as they usually don't require a down payment or mortgage insurance. Borrowers pay a onetime VA Funding Fee, which can be rolled into the loan, and the fee can be waived for veterans with a service-connected disability rating of 10% or greater.
Backed by Fannie Mae or Freddie Mac, conventional loans typically require a starting score of 620. However, to secure the most competitive interest rates, a credit score of 740 or higher is usually required. If your down payment is less than 20%, the lender will also likely require Private Mortgage Insurance (PMI), which can be canceled once you reach 20% equity in the property.
Insured by the Federal Housing Administration, an FHA loan offers a lending option for those with a lower credit score. You may qualify with a score as low as 580 with a 3.5% down payment. If your score is between 500 and 579, you're usually required to put 10% down.
One unique feature of the FHA loan is a 1.75% Upfront Mortgage Insurance Premium (UFMIP), calculated on the base loan amount, plus an Annual Mortgage Insurance Premium (Annual MIP). The Annual MIP is a recurring fee, often 0.55%, added to your monthly mortgage payment.
If you're able to put down 10% or more, the Annual MIP will drop off after 11 years. However, for an FHA loan, if you put down less than 10%, that monthly insurance premium stays for the life of the loan. You cannot cancel it without refinancing into a different loan type later.
Consider the following example of a $300,000 loan:
Credit scores are clearly driving the homebuying train and lending options, but what goes into calculating them? Most lenders use the FICO model, which weights information in five categories:
1. Payment History (35%): This is the most significant factor. Lenders want to see a consistent track record of on-time payments.
2. Amounts Owed/Credit Utilization (30%): This measures how much of your available credit you're using. Are your credit cards maxed out, or do you have some breathing room? Ideally, keep balances below 30% of your limit.
3. Length of Credit History (15%): The longer your accounts have been open, the better.
4. New Credit (10%): Opening several new accounts in a short period can signal financial distress. If you anticipate purchasing a new home within the next year, be mindful of any new debt, including credit cards, student loans, and vehicle loans.
5. Credit Mix (10%): A blend of installment loans, such as vehicle and student loans, in combination with revolving credit from credit cards can slightly improve your score.
If you're wondering, "Can I buy a home with bad credit?" The short answer is yes, but it will require some strategy. If your score is below 620, the lending process will require more scrutiny. Lenders will look closely at your current residual income, which is the money left over each month after debts and projected housing costs are paid.
For service members, stable military pay and a clean 12-month rental history are powerful tools to prove creditworthiness. Additionally, there are often state-assisted housing resources geared toward first-time homebuyers, low-to-moderate income buyers, first responders, or buyers with extenuating circumstances such as a one-time bankruptcy caused by medical issues.
For example, here are a few programs available in Texas:
If your credit score isn’t where it needs to be, how fast can you fix it? Here are some realistic timelines.
30 to 60 days: If your score is low due to high credit card utilization, you can see a jump quickly by paying those balances down. Once the creditor reports the new balance, the score adjusts.
Six months to a year: If you're recovering from missed payments or collections, a more realistic repair timeline is six to twelve months of consistent, on-time payment history in addition to paying down outstanding debt.
Your credit score is a snapshot in time, not a permanent grade. By securing mortgage pre-approval early, you can identify exactly where your creditworthiness stands and what steps you need to take if a course correction is needed.
Starting with a clear financial picture ensures that when the right home appears, you are ready to make a move, and MilitaryByOwner has the resources to support you every step of the way.
Learn more about getting your finances in order before buying a home with our free guide below.