Editors note (April 2022): FHA loans were previously available to borrowers with a 500 credit score and a 10% down payment. However, given the current economic situation lenders are no longer lending to borrowers with a credit score below 580.
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What are FHA Loans?
FHA mortgage loans are government-backed home loans guaranteed by the Federal Housing Administration and offered by private lenders. They require a mortgage insurance premium of 0.80% – 1.05% and an upfront MIP fee of 1.75% of the loan amount.
- 580 credit score with 3.5% down
- 50% maximum debt-to-income ratio (DTI)
- 1.75% upfront MIP fee
- For primary residences only
FHA Credit Guidelines
FHA loans require a borrower to have at least a 500 credit score with a 10% down payment. If a borrower has a minimum 580 credit score, the FHA will insure the loan with a 3.5% down payment. But lenders look at more than just your credit score. If you have late payments, excessive debt, or collection accounts on your credit report, it may cause you to be denied even if you meet the credit score requirement.
- No more than one late payment on any account in the past 12 months
- No late mortgage payments in the past six months
- Two-year waiting period after bankruptcy or short sale
- Three-year waiting period after a foreclosure
- Collections, judgments, and federal debt should be paid or on a payment plan
Your Down Payment Affects the Mortgage Insurance Premium and Duration
Your down payment will determine the FHA MIP rate and the length of time you will be required to carry it. With a down payment of 10% or more down you can cancel MIP after 11 years. With a down payment, less than 10% mortgage insurance is required for the life of the loan.
There are two forms of mortgage insurance for FHA-insured loans.
- An up-front MIP fee is 1.75% of the loan amount
- Monthly MIP payments (rate varies)
What’s on Your Credit is More Important than Your Score
A borrower with a 580 credit score may actually be able to qualify, while a borrower with a 620 credit score is denied. Why your credit score is low is actually more important than your score. Consumers’ credit scores can be low for different reasons. Let’s look at a couple of scenarios.
- Applicant 1 has a 600 credit score. They pay their bills on time, but their score is low because their credit cards are almost maxed out, and they haven’t had their account open for very long.
- Applicant 2 has a 620 credit score. All their credit cards have low balances, but they have several recent late payments bringing their score down.
Even though applicant 1 has a lower credit score, they are more likely to get approved for an FHA loan. Applicant 2 should qualify based on their credit score but likely will not because of recent late payments.
Borrowers with No Credit
It is possible to get an FHA-insured mortgage with no credit score or history. While traditional lenders require at least two lines of credit. Borrowers with no credit score can qualify using non-traditional credit lines. This includes utility and cell phone bills, insurance payments, and proof of rent payment.
Bankruptcy Waiting Period
Borrowers can qualify for an FHA loan 24 months after bankruptcy. If you have extenuating circumstances such as a loss of income or a medical condition that caused your bankruptcy, you may be eligible for the FHA back-to-work program after just 12 months.
How to Apply
To apply for an FHA home loan, you must complete a loan application with an FHA-approved lender. Many private lending institutions are authorized to offer FHA mortgage loans.
FHA loans come with closing costs and other fees. These fees vary depending on the lender. You should compare loan offers with multiple lenders to ensure you’re getting the best deal.
Increase Your Credit Score Before Applying
Your FICO score has the biggest impact on not only if you’re approved or not but on your mortgage rate. Here are a few tips to help you improve your FICO score before applying.
- Pay down your credit card balances – Your credit utilization ratio is the amount of available credit you’re using. The lower your credit card balances, the higher your credit score will be. Try to keep your card balances below 15% of their limits.
- Pay your bills on time – Your payment history is the biggest factor in determining your credit score. Make sure you don’t miss any payments; a single late payment can significantly harm your score.
- Don’t apply for any new credit or loans – New accounts and credit inquiries account for 10% of your overall FICO credit score. While not a major factor, it is wise to avoid applying for anything before trying to get a mortgage loan.
Read our article for more tips to increase your credit score
The Bottom Line
FHA loans have the lowest credit score requirements of any home loan. But, your credit history is just as important as your credit score.
Before you apply, make sure your entire credit history looks good, lenders care more about recent credit then they do about older accounts.
Do you think you’re ready to apply for an FHA mortgage?