FHA credit score: What you need to know about FHA loan requirements

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FHA loan credit score requirements are generally lower compared to other types of mortgages. If you have a lower credit score, this option can offer you a better chance of qualifying for a home loan.

Minimum FHA loan credit score requirement

The minimum credit score to qualify for an FHA loan is 580 with a down payment of 3.5 percent. If you can bump up your down payment to at least 10 percent, you can have a credit score as low as 500 and still qualify.

What is an FHA loan?

FHA stands for Federal Housing Administration, a government agency that insures mortgages. FHA loans are designed for low- to moderate-income borrowers, and require at least a 3.5 percent down payment.

“[Money for the down payment] can come in the form of a gift from a relative or a close friend of the family,” explains Robert E. Tait of Motto Mortgage Elite Services in Bucks County, Pennsylvania.

This aspect of FHA loans is one of many reasons why they’re attractive to homebuyers. Compared to conventional loans, FHA loans have more relaxed underwriting, including a higher debt-to-income ratio and flexibility if you’ve have had financial difficulties like a bankruptcy in the past.

FHA loans are also appealing to buyers who don’t have a lot of cash because of the FHA’s flexible standards on who pays for closing costs.

“FHA loans are targeted for people who might have marginal credit and who need the maximum seller assistance in the form of seller credits at closing,” Tait says. “With the seller credits, you can effectively cover 100 percent of your closing costs.”

While FHA loans have a lower credit score requirement, if your score is below 600, be prepared to find a lender who can put your application through manual underwriting, since getting approved can get more challenging the lower your credit score, Tait says.

There are different types of FHA loans, including:

  • Purchase loans: For buying a home
  • Streamline refinances: For refinancing an FHA loan to a new one without needing to undergo a credit check or other steps in the underwriting process
  • 203(k) loans: For buying and fixing up a home

Why do different mortgage lenders have different FHA credit score requirements?

Each mortgage lender has the flexibility to decide what loans they wish to offer and the lowest credit scores they’re willing to accept. Even though the FHA has requirements, FHA-approved lenders can also impose their own standards, a practice known as “overlaying,” depending on the level of risk they’re willing to tolerate. That’s why you might see different FHA credit score requirements with different lenders.

“We have large lenders in this country that exited from doing government loans five or more years ago,” Tait explains. “Some of them just won’t do an FHA loan.”

Other FHA loan requirements

FHA debt-to-income ratio

While you’re exploring the qualification process for FHA loans, you’ll hear about DTI, or debt-to-income ratio. The maximum DTI ratio is typically 43 percent, though your lender could make exceptions up to 45 percent, 50 percent or even 57 percent with an FHA loan.

FHA loan limits

FHA loans have loan limits that dictate how much you can borrow depending on the type of property you’re financing and where you’re buying. In 2021, the FHA loan limit for a single-family home in most counties is $356,362, but can be as high as $822,375 in higher-cost areas.

FHA mortgage insurance

If your down payment is less than 20 percent, you’ll be required to pay FHA mortgage insurance premiums (MIP). MIP are fees you pay to protect the lender in case you default on your loan. In most cases, FHA borrowers pay MIP at closing and every year for the life of their loan.

How to boost your credit score to meet FHA loan requirements

Improving your credit score before you start shopping for an FHA loan can increase your chances of being approved. Tait recommends taking steps to boost your score now if you believe you’ll purchase a home within the next year.

“[Start by] getting your credit pulled, finding out what is on your credit report and align yourself with a lender who will help you improve your credit,” Tait says.

When you check your credit report, make sure it’s correct. If there’s anything listed there you don’t recognize, work with creditors to remove incorrect items. You might also need to work to pay off any debt that’s fallen into collections — which can seriously hurt your score — or contact previous lenders to clear out any old or resolved debt that’s been paid off. Other steps you can take include making on-time payments, paying down existing debts as much as possible, and refraining from taking out other loans or applying for new forms of credit as you’re shopping around.

Bottom line

FHA loans aren’t right for everyone, but they can be advantageous for borrowers with lower credit scores. The best way to determine the right mortgage for you is to work with a mortgage lender to learn about your options.

With additional reporting by Sarah Li Cain

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Written by
Jennifer Bradley Franklin
Contributing writer
Jennifer Bradley Franklin is a multi-platform journalist and author, often covering finance, real estate and more.
Edited by
Mortgage editor
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