How to Get an FHA Loan with Bad Credit



FHA loan for bad credit

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 poor credit and where to find lenders that work with less-than-perfect credit scores.

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What is an FHA Loan?

FHA loans are a type of government-backed mortgage loan guaranteed by the Federal Housing Administration and offered by private lenders. Because FHA mortgages are guaranteed, mortgage lenders can approve borrowers with lower credit scores than other mortgage programs.

FHA Credit Guidelines

Credit Score

Down Payment

500-579 credit score

3.5% down payment

580+ credit score

10% down payment

FHA loan requirements state that borrowers with a minimum 580 credit score can get a loan for 96.5% of the purchase price, meaning a 3.5% down payment. However, borrowers with a credit score between 500-579 will have to come with 10% down.

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

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 taken into consideration.

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

Example:

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 much more likely to be approved than borrower 1.

Why? Because not all credit scores are created equally. 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.

More» Complete FHA Credit Requirements

Credit Requirements by Loan Type

FHA loans are really the only mortgage program for people with bad credit. Unless you’re a veteran, eligible for a VA loan which does not have a minimum credit score requirement. All other loans typically require at least a 620 FICO score to qualify.

Loan Type

Minimum Credit Score

FHA Loan

580 credit score with 3.5% down
500-579 credit score with 10% down

USDA Loan

640

VA Loan

No minimum but most lenders require between a 580-620 credit score

HomeReady Loan

620

Home Possible Loan

620

203k FHA Rehab Loan

640

Conventional Loan

620

Improve Your Credit Score Before Applying

If your credit score is in the 580-640 range, I recommend 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.

There are several things you can do 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 considered 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.

  • Excellent credit – 720+
  • Good credit – 680-719
  • Average – 640-679
  • Bad credit – 580-639
  • Terrible credit – Under 580