FHA loans have the lowest credit score requirement of any type of home loan. A borrower with a 500 credit score may and a 10% down payment is eligible. Technically.
But, lenders look at more than just your credit score. They take your entire credit history into consideration when determining if you qualify for an FHA home loan.
In this article, we’re going to cover all of the FHA credit requirements so you can determine what you need to do to qualify.
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FHA Credit Guidelines
Lenders look at more than just your credit score. If you have late payments, excessive debt, or collection accounts on your credit report it may cause you to be denied even if you meet the credit score requirement
FHA Credit Requirements
• No more than one late payment on any account in the past 12 months
• No late mortgage payments in the past six months
• Two year waiting period after bankruptcy or short sale
• Three year waiting period after a foreclosure
• Collections, judgements, and federal debt should be paid or on a payment plan
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.
Please work on improving your credit score to at least 580 before applying.
What are FHA Loans?
FHA loans are government-backs home loans guaranteed by the Federal Housing Adminstration.
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 and Cons of FHA Loans
• Low credit score requirements
• Lower loan limits
• 3.5 percent down payment
• Includes upfront MIP fee
• Low interest rates
• MIP required for the life of the loan
• Easier to qualify for
• Strict underwriting requirements
• Down payment can be a gift
• For primary residence only
• Fixed and adjustable-rate loan options
• Up to 50% Debt-to-income ratio
• They are assumable
• Seller can pay up to 6% of closing costs
FHA Down Payment
Your credit score determines how much of a down payment you will need.
- 500 credit score requires a 10% down payment
- 580 credit score requires a 3.5% down payment
Unlike conventional loans that 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.
- An up-front MIP fee is 1.75% of the loan amount
- Monthly MIP payments (rate varies)
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 are 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.
Borrowers with No Credit
It is possible to get an FHA-insured mortgage with no credit score, or history.
While traditional 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 chapter 7, or chapter 13 bankruptcy.
Bankruptcy Waiting Period by Loan Type
FHA, USDA, VA, 203k Loans
HomeReady / Home Possible
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.
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 come with closing costs and other fees. These fees vary from depending on the lender. You should compare loan offers with multiple lenders to ensure you’re getting the best deal.
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?