Interested in getting a mortgage but have credit issues?
Then an FHA loan may be a great option for you.
FHA home loans are very popular because they’re available to people with poor credit
In this article we’re going to go over the FHA loan credit score requirements and give you some tips to increase your score before applying for a mortgage.
RATE SEARCH: Get Approved for an FHA Mortgage
What is an FHA loan?
Getting a mortgage used to require a good credit score, high down payment, and a great job you’ve had for years. The Government created the Federal Housing Administration in 1934 to help encourage homeownership in America.
The FHA does not offer the loans directly, you will be able to get an FHA mortgage with a private lender. The FHA will insure the mortgage in the event a borrower defaults on the loan the lender will be paid the amount due by the Federal Housing Administration.
Pros of FHA Loans
- Low credit score requirements
- 3.5 percent down payment
- Low interest rates
- Down payment can be a gift
- Fixed-rate and adjustable-rate mortgage options
- High debt-to-income ratio accepted
- Easier to qualify for
Cons of FHA Loans
- Low loan limits
- Mortgage insurance is required
- High MIP fees
FHA Credit Score Requirement
The lowest credit score for an FHA mortgage loan is 500, the FHA will insure mortgage with a 10% down payment (90% loan-to-value ratio).
Why FHA Home Loans are so Popular
FHA loans are very popular, especially among first-time home buyers. Mainly because of the low minimum credit score requirement FHA loans offer. Conventional loans require a higher credit score, usually around 620-640 making them difficult to qualify for.
FHA Down Payment
FHA loans also have a much lower down payment requirement than conventional loans do. If you have a 580 credit score you just need 3.5% down with FHA.
Another great benefit of FHA loans is that the down payment can be a gift from a friend or family member. The FHA allows up to 100% of the down payment to be gifted.
Mortgage Insurance Premium
In order for the FHA to insure all the mortgage loans being offered they need the funds to do so. This comes in the form of a mortgage insurance premium, known as MIP for short. There are two forms of MIP, up-front MIP and an annual MIP fee.
The up-front MIP fee is 1.75% of the loan amount. The annual MIP fee depends on several factors such as the amount of the loan and the loan-to-value (LTV ratio). Typically the fee is 0.85% of the loan amount and is charged monthly. New FHA rules require MIP to be charged for the life of the loan in most cases.
Here you can view the FHA mortgage insurance fee chart
FHA Streamline Refinance Program
Homebuyers who get an FHA loan may also qualify to refinance after a 210 day waiting period. A FHA streamline refinance technically doesn’t require a credit check at all, according to the FHA.
However, most mortgage lenders will run credit before offering a streamline refinance. Typically you will need a 620 minimum credit score for an FHA refinance.
FHA Loan Limit
The FHA loan limit was recently increased from $271,050 to $275,665 in low cost areas of the county. High costs areas saw an increase from $625,500 to $636,150. If you need a loan that exceeds the FHA loan limit you will need to get a conventional loan. Check FHA loan limits in your area here.
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 with 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. FHA mortgages are one of the few types of mortgage programs you can qualify for with bad credit. The minimum FHA credit score requirement is just 500. But remember, a bad credit score equals higher rates.
So it’s vital that you maximize your credit rating before going to an FHA lender. Here are a few tips to help you improve your FICO scores before applying for a mortgage.
Pay down your credit card balances
Your credit utilization is the ratio of your credit card balances compared to the available credit limit. For example if you have a credit card with a $10,000 credit limit and the balance is $5,000 your credit utilization ratio is 50%.
Your credit utilization ratio has a large impact on your overall credit rating. In fact, 30% of your overall credit score is impacted by your credit utilization ratio. If you’re carrying high credit card balances your credit score is suffering. Try to keep your card balances below 15% of their limits.
Don’t apply for any new credit or loans
When you apply for any new credit lines or loans the lender will perform a credit check. This puts a hard inquiry on your credit history and has an impact on your credit score.
New accounts and hard 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
The bottom line…
The FHA loan credit score requirement is a 500 credit score with a 10% down payment. And a 580 minimum credit score is needed with a 3.5% down payment. The FHA allows for 100% of the down payment to be a gift from a friend or family member.
Before you apply for an FHA loan its important to maximum your credit scores. You can do this by paying down your credit card balances and not applying for new credit.
Do you think you’re ready to apply for an FHA mortgage?
The Lenders Network has the largest network of mortgage lenders that specialize in home loans for borrowers with all types of credit scores. We will match you will the best lender based on your specific situation.