What is an FHA Loan?
An FHA loan is a mortgage loan that is backed by the government and insured by the Federal Housing Administration. Typically, first time homebuyers will take the FHA route, because it only requires a 3.5% down payment, versus 20%. Many borrowers aren’t even aware you can put less than 20% down, so its good to be educated on different loan programs before you start house hunting.
Although, if you do get an FHA mortgage loan and put down less than 20%, you will have mortgage insurance, it’s an FHA requirement. Don’t worry, its not permanent! You can always refinance once you build up 20% equity in the home to remove that pesky mortgage insurance.
Credit Score Tiers
Here’s a quick refresher on the credit score tiers!
300-579 – Very Poor
580-669 – Fair
670-739 – Good
740-799 – Very Good
800-850 – Excellent
When looking at your credit report, you will see three scores. One from each bureau, Transunion, Experian, and Equifax. Lenders take the middle of the three scores to help determine your interest rate on the mortgage. Quick rule of thumb: The higher your credit score, the lower interest rate will be. Each type of mortgage loan has different credit score requirements, and FHA is typically the most lenient. This is another reason why FHA loans are more attractive to first time homebuyers.
FHA Credit Score Minimum
The minimum middle score most lenders will take is 500, which is in the ‘Very Poor’ credit score tier. Let’s say we have a borrower that has their middle score come in at 505, but still wants to purchase a home. It’s not impossible, but obviously a 505 credit score isn’t ideal either. In this situation, the borrower would need at least a 10% down payment to be approved for the loan. If a credit score comes in below 580, substantial income is critical to make sure the DTI (Debt to Income Ratio) is under 45%. Also remember that a low credit score will yield a much higher interest rate.
See here how DTI is calculated
Front-End DTI =Proposed Monthly Housing Expense
Income
Back-End DTI = Monthly Liabilities + Proposed Monthly Housing Expense
Gross Monthly Income
So, in short, it is possible to buy a home with poor credit through the FHA loan program. If you know your credit could use some working on check out our blog post on quick ways to improve your credit,HERE!
Ideally, you would want your credit to be in the 620 range if you are wanting to purchase a home to prevent having a high interest rate. If your median score is at or above 620, the DTI requirements are a little more lenient and you will qualify for a much lower interest rate.
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FAQs
FHA minimum credit score
What is the lowest credit score FHA will accept? ›
Credit score: While the FHA has set the minimum credit score at 500, many FHA-approved lenders require higher minimum FICO scores of at least 620. Down payment: While obtaining an FHA loan requires you to make a down payment, that payment doesn't necessarily have to come from your savings account.
Can you get approved for FHA with 600 credit score? ›
Yes, you can buy a house with a 600 credit score — but it would be less challenging if your score were higher. A 600 score will not be high enough to qualify for a conventional home loan, so look into FHA loans, which have lower requirements: 500 with a 10 percent down payment, and 580 with a 3.5 percent down payment.
What will disqualify you from an FHA loan? ›
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
What is the FHA rate for a 620 credit score? ›
However, a credit score of 620 could qualify you for an FHA loan with a rate of 4.125%. This is a 0.75% drop from a score of 610, which could save you over $40,000 in interest payments on a $250,000 home. FHA loan applicants with a credit score of 620 or higher could qualify for down payment options starting at 3.5%.
What credit score is needed to buy a $300K house? ›
What credit score is needed to buy a $300K house? The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of loan. For an FHA loan, the minimum credit score is usually around 580.
What's the lowest FICO score to buy a house? ›
Credit score needed to buy a house by mortgage type
| Loan Type | Minimum Credit Score |
|---|
| Conventional loans | 620 |
| FHA loans | 500 (with 10% down payment); 580 (with 3.5% down payment) |
| USDA loans | 640 |
| VA loans | The VA has no minimum limit, but lenders generally like to see at least 620 |
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According to a 2020 report by the Consumer Financial Protection Bureau (CFPB), FHA borrowers are more likely to be denied for FHA loans than all other loan types: 14.1% of FHA purchase loans and 22.2% of FHA refinance applications were turned down in 2020.
Why would a house not be FHA approved? ›
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
Why is it so hard to get an FHA loan? ›
While FHA loans can be much more forgiving compared to other types of loans one of the reasons an FHA application is declined is due to high debt-to-income ratios. Most lenders ask the total amount of monthly credit obligations, including the mortgage, should be no higher than 43 percent of gross monthly income.
The FHA approves loan amounts based on several factors, such as your monthly income and expenses, credit score, interest rate, the loan term and the value of the property. The maximum FHA loan in most areas of the country for a single-family home is currently $420,680 for 2022.
Is FHA better than conventional? ›
FHA-approved lenders can issue loans that are insured by the Federal Housing Administration and are ideal for buyers looking for low down payment options, flexible income and credit guidelines. Conventional loans aren't insured or guaranteed by government agencies.
How much can I borrow with a 630 credit score? ›
You can borrow anywhere from a few thousand dollars to $100,000+ with a 630 credit score. The exact amount of money you will get depends on other factors besides your credit score, such as your income, your employment status, the type of loan you get, and even the lender.
Can you really get an FHA loan with a 500 credit score? ›
Technically, you can get approved for an FHA loan with a median FICO® Score of as low as 500, but an FHA loan with a score that low has some serious drawbacks. The first drawback is that you'll need a down payment of at least 10%. Secondly, when qualifying with a score that low, it's considered a subprime loan.
Can I get an FHA loan with a 550 credit score? ›
The minimum credit score actually needed to qualify for a mortgage through the FHA is 500, provided you have the capacity to make a 10% down payment. If you can put in a bit of effort on your credit score and increase it up to 580, you can secure an FHA loan for as little as a 3.5% down payment.
Can I buy a house with a 580 credit score? ›
The Federal Housing Administration (FHA) insures FHA loans, which allows mortgage lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or 500 with a 10 percent down payment.
What credit score do you need for a FHA loan in 2024? ›
A borrower must have a FICO credit score of 500 or higher to qualify for an FHA loan. When two or more borrowers apply for an FHA loan, the lowest individual score is considered.
