FHA Loan Credit Requirements
With home prices rising and interest rates up as well, buying a home is becoming more and more difficult for many Americans.
Fortunately, thanks to FHA loans, homeownership is still within reach, even for those with less-than-perfect credit. Offering easy qualification standards and low credit score requirements, these low-cost loans make buying a home not only possible, but also affordable.
Your Credit Score
It’s important to note that what constitutes a “low” credit score is different for every lender, and the score you pull from Experian, TransUnion or any other reporting agency may be different than what a mortgage lender sees as your score.
Generally, lenders will look at a buyer’s score across multiple reporting agencies, focusing on the median or middle of those scores to determine loan eligibility and interest rates.
Minimum Credit Score for FHA Loan
Generally, the FHA minimum credit score is the lowest among all mortgage loan types. Consumers with scores as low as 500 can qualify for an FHA loan and still buy a home.
Because lending to lower-credit buyers is more of a risk, low credit scores also come with higher down payment requirements. With a credit score of 580 or higher, a buyer would qualify for the FHA’s lowest down payment amount -- 3.5% of the total cost of the home. If that same buyer had a 500 credit score instead? Their down payment would more than double, jumping to 10% of the home’s cost.
But it’s also important to understand that lenders set their own credit score minimums for FHA loans. While the FHA might allow sub-600 credit scores, borrowers with those kinds of scores might have a tough time finding lenders willing to move forward. Talk with lenders about their credit score guidelines and what might be possible.
Manual Underwriting and FHA Loans
FHA loans use what’s basically an automated scorecard to automatically give borrowers initial loan approval. It includes things like income, debt, credit score and more. But because every buyer is different, not all buyers can be approved (or even evaluated) by this method. In this case, the loan file is moved to manual underwriting, and an underwriter reviews the file by hand from the start.
This review includes an evaluation of the buyer’s credit history, payment history, income, employment, debts, student loans and other financial liabilities, including things like child support and alimony. Manual underwrites will often have more restrictive lending guidelines than loans that are approved automatically.
Loan files with automatic approval must still go through an underwriting process to verify key information.
FHA vs. Conventional Loans: The Down Payment Requirements
As mentioned above, FHA loans allow as little as 3.5 percent down – or about $7,000 on a $200,000 home.
Down payment requirements for conventional loans can vary by lender and other factors but a 5 percent minimum is common. That would mean a $10,000 down payment on a $200,000 property.
If coming up with your down payment is difficult, both loan types allow you to use gift money toward your payment. However, with an FHA loan, your entire down payment can be from gift funds, while those using a conventional loan may need to put down a portion of their own funds before being able to include gift money. Talk with a lender for more details.
Can You Get an FHA Loan without a Credit Score?
Many consumers don’t have a credit score at all. They may have never opened a credit card or taken out a loan, or they may be too young to have done so yet. Either way, borrowers will typically need to have a qualifying credit score in order to obtain an FHA loan.
When dealing with buyers without a credit score, lenders might be able to turn to alternate tradelines for help. This history can include things like past rent payments, utility bills or even payments of a gym membership or school tuition. The goal is to have a clear picture of the buyer’s payment history and their likelihood to repay their mortgage loan, should they be approved for one.
Guidelines on credit scores and alternate tradelines can vary by lender.
How Do FHA Loan Credit Requirements Compare?
FHA loan credit requirements are often significantly lower than other loan options. As you can see in the chart below, the minimum credit score for FHA loan borrowers can be as low as 500 -- more than 100 points lower than what’s common for other mortgage types.
Keep in mind though, these loans will also come with a higher down payment. In the event that down payment is less than 20 percent, you’ll also need to pay Private Mortgage Insurance for a period of time.
Questions about whether you qualify?
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