FHA loans are popular because borrowers can qualify with less-than-perfect credit.
The minimum credit score for FHA loans is 500 with 10% down, or 3.5% down with a 580 credit score.
In this article we’re going to go over all FHA loan guidelines and requirements.
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FHA Credit Guidelines
FHA loans require a borrower to have at least a 500 credit score with a 10% down payment.
It’s important to note that lenders set their own credit requirements for FHA loans, and do not have to go with the FHA requirements.
Many lenders will not accept scores below 620 for an FHA loan, some lenders that can accept a 580 score.
There are lenders that offer loans to borrowers with scores under 580 with 10% down. However, these loans are very difficult and there is a good chance the loan will not close.
Please work on improving your credit score to at least 580 before applying.
What’s on Your Credit is More Important than Your Score
A borrower with a 580 credit score may actually be able to qualify, while a borrower with a 620 credit score is denied.
Why your credit score is low, is actually more important than your score. Consumers credit scores can be low for different reasons. Let’s look at a couple of scenarios
Applicant 1 has a 600 credit score. They pay their bills on time, but their score is low because their credit cards are almost maxed out, and they haven’t had their account open for very long.
Applicant 2 has a 620 credit score. All their credit cards have low balances but they have several recent late payments that is bringing their score down.
Even though applicant 1 has a lower credit score, they are more likely to get approved for an FHA loan. Applicant 2 should qualify based on their credit score but likely will not because of recent late payments.
FHA Credit Guidelines
- No mortgage late payments in past 12 months
- No more than one late payment in past 12 months
- Limited collection accounts
- No unpaid collection accounts
Borrowers with No Credit
It is possible to get an FHA-insured mortgage with no credit score, or history.
While traditionally lenders require at least two lines of credit. Borrowers with no credit score can qualify using non-traditional credit lines. This includes utility and cell phone bills, insurance payments, and proof of rent payment.
Bankruptcy, Foreclosure, and Short Sale Guidelines
Borrowers can qualify for an FHA loan two years after the discharge of a chapter 7, or chapter 13 bankruptcy.
Bankruptcy Waiting Period by Loan Type
- FHA loan – 24 months – ch 7 /12 months ch 13
- VA loan – 24 months – ch 7 /12 months ch 13
- USDA loan – 36 months – ch 7 /12 months ch 13
- Conventional loan – 2 years after discharge date for ch 7 and ch 13
Borrowers with a foreclosure, or short sale will need to wait 3 years before they can qualify for FHA.
Foreclosure, or Short Sale Waiting Period by Loan Type
- FHA loan – 36 months
- VA loan – 24 months
- Conventional loan – 7 years
- USDA loan – 36 months
You may qualify just 12 months after a chapter 7 bankruptcy
A borrower may qualify for an FHA-backed loan just 12 months after a bankruptcy, or foreclosure with the FHA back-to-work program.
If the reason for the financial hardship was caused by circumstances beyond your control such as, being laid off from a job, medical reasons, or reduction in income that lead to a 25% decrease in household income.
Minimum Credit Score for all Loan Types
- FHA loans – 500 credit score with 10% down, or 3.5% down with a 580 credit score
- VA loans – No minimum credit score, Many lenders require 620+, some lenders accept 500+
- USDA loans – 640 credit score
- 203k loans – 640 credit score
- Conventional loans – 620 credit score
- Conventional 97 loan – 680 credit score
Why They’re so Popular
FHA loans are very popular, especially among first-time home buyers.
46% of first-time homebuyers used an FHA loan to purchase their home.
Because first-time buyers typically have less money saved and lower credit scores, FHA loans are an obvious choice.
Conventional loans usually have a 640 credit score minimum requirement as opposed to FHA which requires just a 500 Fico score.
Pros of FHA Loans
- Low credit score requirements
- 3.5 percent down payment
- Low interest rates
- Easier to qualify for
- Down payment can be a gift
- Fixed-rate and adjustable-rate loan options
- High debt-to-income ratio guidelines
Cons of FHA Loans
- Low loan limits
- Mortgage insurance is required
- High MIP fees
FHA Down Payment
The FHA down payment amount depends on your credit score.
- 500 credit score requires a 10% down payment
- 580 credit score requires a 3.5% down payment
Unlike conventional loans which do not require mortgage insurance if a borrower has 20% down. FHA loans will require mortgage insurance regardless of the down payment.
Down Payment Affects Mortgage Insurance
There are two forms of mortgage insurance for FHA-insured loans.
Up-front MIP and a mortgage insurance premium.
The up-front MIP fee is 1.75% of the loan amount.
How to Apply
In order to apply for an FHA home loan you must complete a loan application with an FHA-approved lender. Many private lending institutions are authorized to offer FHA mortgage loans.
It is highly recommended that when applying you get a rate quote from 3-4 different lenders.
FHA loans, like all mortgage loans come with closing costs and other fees. These fees will vary lender to lender. Getting a few loan quotes will help you ensure you’re getting a good deal on your mortgage.
Increase Your Credit Score Before Applying
Your FICO score has the biggest impact on not only if you’re approved or not, but on your mortgage rate.
Here are a few tips to help you improve your FICO score before applying.
Pay down your credit card balances
Your credit utilization ratio is the amount of available credit you’re using.
The lower your credit card balances, the higher your credit score will be. Try to keep your card balances below 15% of their limits.
Don’t apply for any new credit or loans
New accounts and credit inquiries account for 10% of your overall FICO credit score. While not a major factor, it is wise to stay away from applying for anything before trying to get a mortgage loan.
Read our article for more tips to increase your credit score
FHA loans have the lowest credit score requirements of any type of home loan.
500 credit score with 10% down, and a 580 credit score is needed with 3.5% down.
But, your credit history is just as important as your credit score.
Before you apply make sure your entire credit history looks good, lenders care more about recent credit then they do about older accounts.
Do you think you’re ready to apply for an FHA mortgage?
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.