Mortgage

FHA mortgage credit score rating necessities: FHA for low-credit consumers

What credit score do I need for an FHA loan?

To take advantage of the FHA’s lowest down payment (just 3.5%) the Federal Housing Administration requires a credit score of least 580.

If your credit score is lower — between 500 and 579 — you may still be eligible for an FHA loan. But you’ll need to make a higher down payment of 10% or more.

Ready to find out if you qualify? Here’s a more in-depth look at FHA’s credit requirements.

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FHA loan credit score requirements

The FHA loan allows for lower credit score requirements than most other mortgage programs. In fact, the Federal Housing Administration states that mortgage borrowers cannot be rejected based on a “lack of credit history, or the borrower’s decision to not use credit”.

In other words, you might qualify for an FHA loan if you have a low credit score or even no credit score at all. (But keep in mind that low scores due to poor credit management, like missed or late debt payments, can still disqualify you.)

FHA loans have two basic tiers when it comes to credit score requirements:

FICO scores of 500-579 (10% down required)FICO scores of 580 and up (3.5% down required)

However, mortgage lenders have the flexibility to decide which loans to offer and to set their own guidelines. This includes minimum credit scores.

The practice of setting stricter lending guidelines is commonly known as having “lender overlays.” Overlays are the reason you’ll see different credit score requirements for the same home loan program, depending on the lender.

While some lenders offer FHA loans with scores as low as 500, most require a “safer” credit score of 580 or higher. Aside from obtaining a Non-QM loan, if your credit scores are lower than 620, you may not have many other options for a home loan.

To qualify for an FHA loan with a 3.5% down payment, you’ll need a minimum FICO credit score of 580.

FHA loans with a 500 credit score

Although the FHA allows for credit scores as low as 500, don’t be surprised if you have a tough time finding a lender. Most lenders want to see a minimum score of 580-600 for an FHA loan. Some lenders even require scores starting at 620 or 640.

If you’ve found a lender offering FHA loans with credit scores between 500 and 579, be prepared for a few other caveats as well.

10% down payment: Instead of the traditional 3.5% down payment that FHA loans are known for, you’ll need to put at least 10% down when your credit score is below 580Manual underwriting: Most mortgage loans go through automated underwriting software for their initial and final approval. For lower-credit mortgage borrowers, manual underwriting is typically required. This process can take longer and may come with additional steps or conditionsStricter debt ratio requirements: Unless you have “compensating factors” to offset your lower credit scores, it may be tough to find a lender that will approve you with a debt-to-income ratio above 43%. FHA borrowers with higher credit scores can often get approved with DTIs up to 45% or even 50% (again, with compensating factors like a bigger down payment or cash reserves)

In addition to tougher underwriting standards, prepare for a higher interest rate to offset the lender’s risk. In general, the lower your credit score, the higher your rate.

Lenders may even charge a higher interest rate along with discount points for that higher rate. So be sure to get multiple quotes and compare them side by side. Look for the lender that’s truly offering the “best” deal overall — meaning the most affordable combination of rates and upfront fees.

FHA credit score requirements for refinancing

According to FHA guidelines, mortgage applicants must have a minimum credit score of 500 to qualify for an FHA refinance. Much like home buying transactions, however, you may have a difficult time finding a lender to approve you with a score below 580.

You might think you can side-step credit score requirements with an FHA Streamline Refinance loan. According to FHA Streamline rules, the lender isn’t required to check your credit, verify your income, or order a home appraisal before approving you for a refi.

In reality, however, many lenders will check the borrower’s credit anyway. As always, lenders want to know they’re making a safe bet when they lend money. Your credit score is a big part of that decision-making process.

For an FHA cash-out refinance loan, you’ll need to have more than 20% equity in your home and at least a 580 FICO score. Most FHA lenders set their own limits higher to include a minimum score of 600-620, though. This is because cash-out refinancing is generally considered to be higher risk than non-cash-out refinance loans, or even a home purchase.

FHA vs. conventional loan credit scores

Conventional loans typically require a credit score of 620 or higher. If your credit score is lower than 620, an FHA loan may be your only option.

The main downside here is that all FHA loans require mortgage insurance. FHA mortgage insurance is known as “MIP,” or “mortgage insurance premium.” If your down payment is less than 20%, conventional loans also require mortgage insurance known as “private mortgage insurance,” or “PMI.”

FHA mortgage insurance premiums vary based on your down payment. Even then, the difference in your premium is negligible; the annual MIP rate drops from 0.85% to 0.80% when you make a down payment of 5% or more.

With conventional loans, however, lower credit scores not only mean higher interest rates but also significantly higher mortgage insurance premiums. That means mortgage insurance is often cheaper on an FHA loan than a conventional loan for buyers with low credit.

As an example, let’s say you have a 620 credit score and you’re putting 5% down on a home using an FHA loan. To have the equivalent insurance premium with a conventional loan and just 5% down, you would need a 700 credit score.

Don’t forget that with both FHA and conventional loans, a lower credit score means higher interest rates. However, a higher interest rate isn’t the end of the world. If you work on your credit, you may be able to refinance your loan for a lower rate soon.

Additional FHA loan requirements

Along with minimum credit score standards, FHA loans have additional requirements for borrowers. Fortunately, these requirements are less stringent as compared to conventional loans.

To be eligible for an FHA loan, you’ll typically need to:

Occupy the home as your primary residenceAdhere to FHA mortgage loan limits, which are lower than conventional loan limitsHave an established credit history – at least two established credit accountsHave adequate and verifiable incomePass an FHA appraisal completed by an FHA-approved appraiserMeet minimum property standards ensuring your house is safe to live in and will retain value over time

Keep in mind that lender overlays may mean additional minimum requirements when applying for FHA financing.

Before you finalize your loan, you should get preapproved with a few different FHA lenders to learn more about their guidelines, interest rates, and upfront fees. Then choose the lender that can best meet your needs and price point.

Your next steps

If your credit scores are low, or if you don’t have a large down payment, don’t lose hope. Even with lower scores, an FHA loan could be the solution for getting into your dream home.

The best way to know if an FHA loan is right for you is by speaking to a mortgage lender about your options. Check your eligibility today.

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