FHA loan credit score requirements: FHA for low-credit buyers
FHA loan credit score requirements: FHA for low-credit buyers
What credit score do I need for an FHA loan?
To take advantage of the FHAâs lowest down payment (just 3.5%) the Federal Housing Administration requires a credit score of least 580.
If your credit score is lower â between 500 and 579 â you may still be eligible for an FHA loan. But youâll need to make a higher down payment of 10% or more.
Ready to find out if you qualify? Hereâs a more in-depth look at FHAâs 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 âlack of credit history, or the borrowerâs decision to not use creditâ.
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:
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 âlender overlays.â Overlays are the reason youâll 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 âsaferâ 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, youâll 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, donât 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 youâve found a lender offering FHA loans with credit scores between 500 and 579, be prepared for a few other caveats as well.
In addition to tougher underwriting standards, prepare for a higher interest rate to offset the lenderâs 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 thatâs truly offering the âbestâ deal overall â 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 isnât 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 borrowerâs credit anyway. As always, lenders want to know theyâre 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, youâll 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 âMIP,â or âmortgage insurance premium.â If your down payment is less than 20%, conventional loans also require mortgage insurance known as âprivate mortgage insurance,â or âPMI.â
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, letâs say you have a 620 credit score and youâre 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.
Donât forget that with both FHA and conventional loans, a lower credit score means higher interest rates. However, a higher interest rate isnât 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, youâll typically need to:
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 donât have a large down payment, donât 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.