FHA Loan Credit Score Requirements
Although FHA loans offer an opportunity for people with less than perfect credit to buy a home, there are limits to how low the potential borrower’s credit score can be. While the purpose of the FHA mortgage loan is to help people become homeowners, extending that opportunity to everyone regardless of their FICO score would pose too much risk for the FHA. The Program would not survive long, and many people who are now eligible would be shut out of the housing market. Knowing where you stand is the first step in preparing to get an FHA home loan.
Standard FHA Credit Scores Needed
The standard set by the Federal Housing Administration is that the borrower must have a 580 or above FICO score. This allows people to get home loans who do not qualify for a conventional mortgage. While 580 is not an absolute requirement, it is very difficult to get a FHA loan with a lower credit score. Thus, the 580 guideline applies to most FHA borrowers.
Getting an FHA Loan with Bad Credit
It is possible to get an FHA loan with a credit score of between 500 and 579, but the requirements are more stringent. First, a 90% Loan-to-Value ratio is required. This means the loan can only cover 90% of the home’s value as determined by an FHA appraiser. Also, the potential borrower may be required to attend credit improvement classes or housing classes to qualify. Finally, if there is a reasonable explanation for why your credit score is below 580, revealing this to FHA and the lender can assess your current payment history to determine if the problem is in the past. The FHA does not lend to individuals with credit scores lower than 500. If you fall into this category, the best thing you can do is get credit counseling and take some time repairing your credit before trying to get an FHA loan.
Down Payments Required
The FHA has strict rules about how much down payment is required to buy a home through their program. If you have a credit score of 580 or above, you may qualify to make a down payment of only 3.5% of the total purchase price. However, if you have a credit score between 500 and 579, you will need to put down at least 10%.
Lenders Must Be Willing
Since the FHA loan program is voluntary, many lenders will not accept applicants with scores lower than 620. Yet, there are lenders who will work with applicants with credit scores of 580 or even lower in some cases. Finding the right lender can take time, so getting help can make it possible for you to move more quickly into home ownership through the FHA program.
If you would like help connecting with an FHA Lender, complete the form on our homepage.