Credit Repair

Credit Score Requirements for an FHA Loan

FHA loans mortgage bungalow

An FHA mortgage is a loan that is guaranteed by the Federal Housing Administration. FHA loans can be used to buy single-family homes, select condos, multi-family homes (up to four units), certain manufactured homes and cooperative apartments.

What’s the minimum score needed to qualify for an FHA loan?

Do you want to take out a new mortgage? If you’ve got at least a 500 credit score, you could qualify for an FHA loan with 10% down. With a 580 credit score, you could put down as little as 3.5% on the new house. Despite the low credit-score requirements, most FHA borrowers don’t have low credit scores. In 2018, the average credit score for an FHA borrower was 670. People with credit scores below 579 made up a tiny fraction of FHA borrowers — just 0.83%.

However, the FHA doesn’t just guarantee purchase loans. Here are the credit-score requirements for other FHA-insured mortgages:

FHA 203k fixer-upper loans

The FHA 203k is a loan for fixer-upper properties. It allows borrowers to finance a home and necessary repairs in a single loan. The credit requirements for FHA 203k loans are the same as for FHA purchase loans. You need a 500 credit score and a 10% down payment to take out an FHA 203k loan. Borrowers with a 580 credit score may qualify for as little as 3.5% down. Down-payment requirements on FHA loans are based on the value of the home after repairs are completed.

Cash-out refinance

If you’re looking to tap into your home equity (and you live in the house as your primary residence), you may qualify for a cash-out FHA mortgage. After the refinance is complete, you need at least 15% equity in your home. You need at least a 500 credit score to qualify for a cash-out refinance.

Streamline Refinance

A Streamline Refinance allows homeowners to refinance existing FHA loans if the new FHA loan is at a lower interest rate or has lower fees than the old loan. If your lender allows it, you may qualify for the non-credit qualifying Streamline Refinance. With non-credit qualifying refinances, your lender does not check your credit score, so there is no credit minimum. However, you have to have made timely payments on your FHA loan for 11 out of the last 12 months to qualify for a Streamline Refinance.

Home Equity Conversion Mortgage (HECM) reverse mortgages

The FHA also guarantees a type of reverse mortgage (for borrowers age 62 and older) called a Home Equity Conversion Mortgage (HECM). Taking out a HECM doesn’t require a specific credit score. But if you’re delinquent on federal debts or you don’t have the income to pay for property taxes or insurance, you may not qualify for a HECM.

Understanding lender overlays

The FHA only requires a 500 credit score for its purchase loans, but lenders may add additional restrictions called “overlays.” For example, Homebridge Financial Services requires at least a 550 credit score on all FHA mortgages. Lenders assess overlays to protect themselves from borrowers who may be at a high risk of default.

The overlays make sense from the perspective of a bank. But if you have bad credit, you may struggle to find an FHA mortgage. How can you find lenders willing to work with you? One of the best ways is to attend a homebuyer education course sponsored by a HUD-approved housing counselor. These are free classes, and HUD-approved counselors can help you find the best lenders in your area.

If I qualify for 3.5% down, should I take it?

The FHA mortgage allows borrowers to buy a home with as little as 3.5% down. Does such a small down payment make sense for you?

Pros of a small down payment

  • Able to buy sooner: With a 3.5% down payment, you may be able to save up for a reasonable house in a few months or a year, even if you’re paying for rent.
  • Won’t drain your bank account: If you’ve got significant savings, a 3.5% down payment won’t drain your bank account. That extra cash can come in handy when you have to deal with repairs that inevitably come when buying a house.

Cons of a small down payment

  • May be trapped in your house: A small down payment means you may not have enough equity pay a real estate agent to sell your house if you have to move suddenly. While that’s usually not a problem, it could be an issue if you decide to take a job across the country.
  • Bigger monthly payments: A small down payment means a bigger monthly payment. With FHA loans, a bigger principal balance on the mortgage also means paying more for required mortgage insurance.

Where can I get my credit score?

Not sure whether you qualify for an FHA mortgage? You can check your credit score for free using My LendingTree. This credit score is a VantageScore 3.0, which is slightly different than the FICO Score your mortgage lender will use.

Mortgage lenders typically use credit scores called the FICO Score 2, FICO Score 4 or FICO Score 5 to determine your credit score. Digital Federal Credit Union offers a free FICO Score 5 to its members. Learn more about which companies offer free credit scores for their customers.

Other requirements for FHA loans

Credit scores aren’t the only requirements for taking out an FHA loan. These are a few of the other standards borrowers have to meet:

Debt-to-income ratios

In most cases, with an FHA loan your monthly housing payment cannot exceed 31% of your gross monthly income. If you have no other debts, your housing payment can consume up to 40% of your monthly pay.

All of your debts combined (including your housing payment) have to eat up less than 43% of your total income.

Appraised home value

With FHA mortgages, an appraiser evaluates a house and determines its value. If the appraisal comes back lower than the amount you offered on the house, you may have to either walk away from the deal or bring more cash to the closing table.

Minimum property requirements

If you take out an FHA mortgage, the house backing the loan has to meet certain property requirements. Most of the requirements ensure that a house is safe to live in and the property is going to retain its value over time.

Other credit requirements

In addition to credit score minimums, the FHA has “seasoning” requirements for major credit events like bankruptcy or foreclosure. Seasoning is the length of time you have to wait until the FHA will insure a mortgage for you. These are the current seasoning requirements:

How to boost your credit score

Want to improve your credit score? These are a few steps you can take:

Make all your payments on time. Making timely payments will build your positive credit history. When you pay all your debts on time, your credit score should grow.

Pay down credit card debt. When you’ve got credit card debt, you’re probably paying a lot of money just on interest charges on the debt. Paying down the credit card debt will cut down the total amount of interest you pay. It will also reduce your credit utilization ratio, which should lead to a higher credit score.

Don’t close your credit card accounts. If you’ve got a credit card that you don’t use, keep the account open. Closing it could shorten your credit history and lower your score. Plus, closing the account would decrease your available credit, which would harm your credit utilization ratio.

 

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