FHA loans are perfect for many homebuyers because borrowers can qualify with just a 500 credit score and 10% down.
However, with at least a 580 credit score, you only need a 3.5% down payment.
This article covers the complete FHA credit guidelines to show how you can get an FHA loan with bad credit and where to find lenders that work with less-than-perfect credit scores.
What is an FHA Loan?
FHA loans are guaranteed by the Federal Housing Administration and offered by private lenders. Because FHA mortgages are guaranteed, mortgage lenders can loosen their borrower requirements. Borrowers with at least a 500 credit score may qualify with 10% down. Borrowers with a 580+ credit score only need a 3.5% down payment.
FHA Loan Requirements
- 500-579 credit score with 10% down
- 580+ credit score a 3.5% down payment is needed
- 43%-50% maximum debt-to-income ratio
- For primary residences only
- Mortgage insurance required
FHA Guidelines for Bad Credit
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 (12 months with extenuating circumstances)
- Three year waiting period after a foreclosure
- Collections, judgments, and federal debt should be paid or on a payment plan.
Tips for Qualifying for an FHA Loan with Bad Credit
- Apply with multiple FHA lenders – Borrowers with poor credit will pay more in closing costs and have a higher interest rate than borrowers with excellent credit. Lenders fees and mortgage rates vary by lender. You should get a loan estimate from at least 3-4 different mortgage companies to help you negotiate the best deal.
- Have a strong loan application – If you have bad credit your loan application should have strengths that make up for it. A large down payment, low debt-to-income ratio, or being with the same employer for several years. Lenders call these compensating factors and you should have some if you have credit issues.
- Pay down debt – Paying down your credit card debt, or paying off an auto loan will help you lower your debt-to-income ratio making your loan application more attractive to lenders.
Bad Credit Only Tells Half the Story
People have low credit scores for various reasons, from late payments to just having a limited account history. Because of this, FHA-approved lenders look at more than just your credit score; your entire credit history will be considered.
Borrower 1: Has a 620 credit score but has multiple late payments and collection accounts. They likely won’t be approved even though they meet the credit score requirement.
Borrower 2: Has a 580 credit score but has no late payments or unpaid collections, but their score is low because they have only had credit accounts for a couple of years. Borrower 2 is more likely to be approved than borrower 1.
A clean credit report without much recent negative account history, even if it’s just a small sample size, is better than having long-established accounts with poor payment history.
Qualifying For FHA Loans After Bankruptcy
Borrowers who have filed bankruptcy will be eligible for an FHA loan 24 months after it has been discharged. 12 months if you have extenuating circumstances that led to the bankruptcy such as a loss of income or medical condition.
- Must wait two years after the discharged date
- One year if meet extenuating circumstances for FHA back-to-work program.
- Borrower must reestablish positive payment history post-bankruptcy
- No waiting period after Chapter 13 Bankruptcy discharged date.
Refinance Your FHA Loan with Bad Credit
If you have an FHA mortgage you may be eligible to refinance to a lower interest rate and mortgage payment with bad credit. Streamline refinancing often doesn’t include a credit check, so no matter how bad your credit is you can still refinance your FHA loan.
You must wait 210 days from the time you closed on your loan before you’re eligible. An FHA streamline refinance requires very little documentation,
Streamline Refinance Requirements
- 210 day waiting period since closing
- No income verification
- Credit check not required
- Must be current on your mortgage
- No late payments on the mortgage in the past 6 months
- No more than one late payment in the past 12 months
- Refinancing must produce a net tangible benefit
How FHA Credit Requirement Compares to Other Mortgages
FHA loans are really the only mortgage for people with bad credit. Unless you’re a veteran, eligible for a VA loan which typically has a minimum credit score needed between 580 and 620 depending on the mortgage lender. All other loans require at least a 620 FICO score to qualify.
Minimum Credit Score Needed by Mortgage Type
- USDA Loans – 620 – The U.S. Department of Agriculture guarantees USDA loans. USDA is a no money down home loan for low-to-median income borrowers whose income is below 115% of the area median income buying a home in rural areas of the country.
- VA Loans – 580-620 – VA home loans are for U.S. military veterans requiring no down payment or mortgage insurance.
- HomeReady and Home Possible Loans – 620 – Designed for low-income first-time homebuyers whose income is below 100% of the area median income. The Home Possible and HomeReady loan programs with a 3% down payment requirement.
- FHA 203k Loans – 640 – 203k loans are a type of FHA home improvement loan that allows borrowers to finance the property plus the cost of home renovations and repairs requiring a 3.5% down payment.
- Conventional Loans – 620 – Conventional loans require a down payment between 5% and 20%. No mortgage insurance is required for borrowers with 20% down.
- Conventional 97 Loans – 680 – A 97% LTV conventional mortgage requiring a 3% down payment, no income limits, mortgage insurance needed.
- Piggyback Loans – 680 – A piggyback mortgage is a way for borrowers to get a conventional loan without needing mortgage insurance by getting two loans, one for 80% of the purchase price and another for 10% of the down payment.
Improve Your Credit Score Before Applying
If your credit score is in the 500-640 range, it’s recommended you improve your score before applying for an FHA loan. Not only will a higher score give you a better chance of getting approved, but your interest rate is also determined by your score as well. The higher your score, the lower your rate will be.
You can do several things to increase your credit score in a fairly short amount of time. Paying down your credit card balances can usually give your score a significant boost within a few weeks.
Ways to Increase Your Credit Score
- Pay down credit card balances – Credit utilization ratio is the amount of available credit you have used compared to your card’s limit. It accounts for a whopping 30% of your FICO score. Only your payment history has a bigger impact on your score. A credit utilization ratio below 20% is ideal.
- Do not apply for new credit – Every time you apply for a loan or credit card, your credit report is pulled by the lender. This results in a hard credit inquiry being added to your report, which will harm your score. Hold off on applying for anything until after your mortgage loan is closed.
- Stay on top of your payments – Payment history is the biggest factor in your score. Make sure you stay on top of all your bills. A single late payment could cause you to be declined for a loan.
- Dispute negative information – The three credit bureaus allow you to dispute any information on your report you feel is inaccurate. Go through your report and file a dispute on inaccurate and negative account information. The credit bureaus have 30 days to validate the account; if they cannot, it will be removed from your credit report.
Please read our article for more tips on improving your credit before applying for a mortgage.
What is Considered Bad Credit?
Many people have different perceptions of what is considered bad or good credit. The average credit score in America is around 680, which is considered fair credit. Typically, a 580-639 score is considered bad credit.
Credit Score Ranges
- 750+ – Excellent credit
- 700-749 – Good credit
- 640-699 – Average credit
- 580-639 – Below-average credit
- Under 580 – Bad credit
Frequently Asked Questions
Can I get an FHA loan with a 500 credit score?
Yes. Technically the FHA will guarantee a mortgage for borrowers with at least a 500 credit score with a 10% down payment. However, the pandemic has made lenders tighten their credit score requirements, and it will be very challenging to qualify for an FHA loan with a credit score below 580.
How can I get an FHA loan with bad credit?
FHA loans have the lowest credit score requirements of any type of mortgage program requiring a 500 credit score with 10% down or a 580 credit score of 3.5%.
What will disqualify you from an FHA loan?
Not meeting the credit score requirement is the most common reason borrowers do not qualify for an FHA loan. You must also have a debt-to-income ratio below 43% – 50%, have funds for the down payment and closing costs and have two years of employment and income history.