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FHA Loan Credit Score: What’s the Real Minimum?

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Just because you can’t afford a big down payment doesn’t mean homeownership is impossible. The Federal Housing Administration (FHA) has been backing home loans for people with low credit scores and smaller down payments since the 1930s. Before applying for an FHA loan, you’ll want to know what those minimum requirements are, if you meet them and — if necessary — how to improve your credit score to qualify.

What is the minimum credit score for FHA loans?

To qualify for an FHA loan, borrowers must at least have a credit score of 500. This makes them eligible for up to 90% financing, meaning they’re responsible for a 10% down payment.

Borrowers with a credit score of 580 or higher are potentially eligible for the maximum financing, a mortgage with a down payment requirement of only 3.5%.

FHA Loan Eligibility
Credit Score 500-579 580+
Potentially qualified for… 90% financing

(10% down payment)

Maximum financing
(3.5% down payment)

Why choose an FHA loan?

FHA loans can be a good option for borrowers with low credit scores and limited money available for a down payment. In fact, the down payment you put down isn’t even required to be your own money — it can also be a gift or loan. FHA guidelines also are more flexible in underwriting, taking into account things like a good previous credit history and larger down payments rather than sticking to strict limits on your overall debt.

FHA loans are also known to have lower interest rates than similar nongovernment-backed loans and are a type of “assumable mortgage.” This means that a buyer could take on your mortgage instead of getting a new mortgage when they purchase your home, allowing them to save money in settlement charges and keeping a lower interest if rates rise. This might be a great bargaining chip for you down the road when it comes time to sell.

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Other mortgage options for people with bad credit

If you’re concerned about your credit score, be sure to also check and see if you qualify for any of these loans.

VA loan

Backed by the U.S. Department of Veterans Affairs, the VA loan program allows qualified veterans to purchase a home with as little as 0% down depending on how expensive the home is. These loans don’t require a certain credit score.

USDA loan

The USDA loan program backed by the U.S. Department of Agriculture allows borrowers in eligible rural areas to finance with as little as 0% down on qualifying properties.

Fannie Mae HomeReady® Program

This conventional loan program offers financing with as low as 3% down for borrowers with low credit scores due to a limited credit history. Underwriters instead look at “non-traditional credit sources” over a period of 12 months to determine borrower eligibility. These credit sources can include things like rent payments, medical insurance coverage and auto payments.

Down payment assistance

Depending on your income and where you live, you may qualify for income-based housing assistance or government grant and municipal bond programs. Contact your local government and nonprofit housing agencies to explore options.

What to do if your credit score is too low

If your credit score is too low to meet the minimum requirements, or if you’d like to improve it to qualify for better financing options, here are some things to consider.

Improve your credit score by paying down your debts. The lower your debt-to-income ratio, the better your overall credit score will generally be. Focus on paying down any debts you can to lower your debt percentage, then work toward keeping that credit in the green and not falling into more debt.

Pay all your bills on time. In addition to getting your debt under control, you’ll want to make sure you’re paying all of your bills on time. A solid history of on-time payments is one of the biggest factors in a credit score, so set up automatic reminders and other budgeting strategies to keep yourself on track.

You might also want to figure out which accounts (if any) are dragging down your credit score. While having multiple open accounts is OK, having several of them with a significant balance will likely lower your score. This is why keeping a credit card open with zero balance is a good idea (closing it could actually hurt your score), but multiple cards with large debts are not.

Keep in mind compensating factors. Even with a high debt-to-income ratio, you could qualify for an FHA loan if you have other factors in your favor. These can include a history of on-time payments or the potential for increased future earnings.

Finding a loan that works for you may take some time, but don’t get discouraged. If you don’t think your credit score is good enough to be approved for an FHA loan, then take the time to make it better before you apply.

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