The Credit Score You Need for a 0% Down Payment Loan

Homebuyers looking to lock in a 0% down payment loan will find themselves with two options: a Veterans Affairs loan and a United States Department of Agriculture loan.

"Zero down loans exist because the down payment is often the biggest barrier to homeownership, not the monthly payment," Steven Parangi, loan expert with Alpine Mortgage Services, tells Realtor.com®. "When structured properly, these loans can be a stepping stone allowing borrowers to build equity, strengthen credit, and move into more traditional financing options down the road."

VA and USDA loans are government-backed programs with specific qualification criteria. However, credit scores still play a role because the government does not fund the loans—private lenders do, and they are the ones who assess your finances.

A USDA loan does not have a minimum credit score set by the federal agency, but lenders may require a score of at least 580 to 620. These loans are insured by the USDA and are meant for low- and moderate-income homebuyers who want to buy a home in a rural area.

The U.S. Department of Veterans Affairs has no minimum credit score either, but lenders who provide VA loans usually require a score of 620 or higher. VA loans were created for eligible members of the military and other eligible beneficiaries.

"VA technically has no minimum, but in real underwriting, most approvals cluster around 620, and some lenders will go to the high 500s if the file is otherwise clean, stable income, low revolving debt, and solid residual cash flow," Matt Schwartz, mortgage broker and co-founder of VA Loan Network, tells Realtor.com.

Schwartz explains that the "USDA similarly can work below 640, but it often becomes a manual, document-heavy process.

"These loans help because the down payment is the barrier, not the monthly payment, so buyers can keep reserves for escrow jumps and repairs, which is what prevents early delinquencies," Schwartz says.

Why your credit matters

A credit score will follow you forever, and that's why staying on top of monthly payments will benefit you in the long run—when you're applying for a loan, lenders will look at that number.

You'll hear a lot about your credit score, also referred to as your FICO score. FICO is short for Fair Isaac Corporation. It's the company behind the credit score model.

The average credit score in the U.S. is 715, according to FICO's Score Credit Insights report.

The higher the credit score, the better the mortgage rate a borrower will secure.

Conventional 30-year fixed mortgages require a minimum credit score of 620. Conventional loans are not insured by a government agency, unlike USDA or VA loans. Rather, these loans follow standards set by government-sponsored entities Fannie Mae and Freddie Mac.

Now, if a credit score is low, government-backed loans allow for more leeway. For example, a Federal Housing Administration loan requires a minimum credit score of 500, if you make a 10% down payment on your home purchase. If you put down less than that, the minimum credit score required is 580.

A difference of a few points in your credit score could make a huge difference in your monthly mortgage payment. That's because it's up to lenders to determine what score a borrower needs to receive the lowest mortgage interest rate.

How to boost your credit score

Building a credit score to a respectable number takes years, not months, but every ounce of effort and consistency will get you closer to that goal. Financial experts advise the following:

• Credit report: First, check your credit report and check for any errors. You should request reports from the three major credit agencies: Experian, Equifax, and TransUnion. You're allowed to access your credit reports from each bureau once a year. If you spot any errors, file a dispute with the credit reporting agency and the creditor.
• Credit card balances: Pay down any debt. Experian explains "credit in use" accounts for up to 30% of your credit score.
• Pay bills: Not only should you pay your bills, but you also need to pay them on time. Payment history accounts for 35% of your credit score. Late payments stay on your credit report for seven years.
• Don't cut cards: The length of credit history accounts for 15% of your credit score. Even if you paid down a credit card, it's not advised to close older credit lines after paying them off. Closing unused accounts might raise your credit utilization ratio and cause your score to drop.
• No new lines of credit: FICO recommends not opening new credit cards to increase your credit utilization ratio. Each credit request can lower your score.