FHA Credit Requirements
One of the great benefits of an FHA loan is the ability for borrowers with poor credit to still have an opportunity to qualify for a mortgage and buy their dream home. The flexible credit score minimums combined with the low-down payment requirements are why FHA loans are so common today.
What are the FHA Credit Score Requirements?
The minimum credit score for an FHA loan with a 3.5% down payment is 580. You can still get an FHA loan if your credit score is between 500-579, but your down payment requirement will be 10%.
In the past, the minimum credit score for an FHA loan was 640 until it was dropped 60 points down to 580. At that point, the number of FHA loans increased dramatically.
FHA Credit Requirements May Differ By Lender
The minimum credit score requirement for an FHA loan is 500, the larger down payment of 10% will also be required. Although the FHA is insuring loans with a FICO score as low as 500, each lender can decide whether they are willing to originate loans for borrowers with scores that low.
There are some additional lender overlays which you may encounter. For example, some lenders may not want to lend money for manufactured homes. This would be their own overlay restriction that is over and above the FHA guidelines.
As a result of these lender-based restrictions, you may talk to a lender who is not approving your loan with a score below 580. Our FHA Lender network can take the guesswork out of finding the right lender.
FHA Credit Score Averages
In 2018, the credit score averages for all FHA loans closed were heavily weighted between 600 and 700. Half of all FHA loans closed had borrowers whose scores fell into that range. Surprisingly, 35% of all FHA borrowers had scores of 700 or greater. Only 7.34% of all FHA borrowers had scores below 600. This is likely due to the lender restrictions we mentioned above and not necessarily related to the FHA credit requirements.
FHA Requirements for the Credit Report
The FHA credit requirements and guidelines have rules regarding the credit report itself. According to the HUD handbook 4000.1 page 182, “The Mortgagee must use a traditional credit report. If a traditional credit report is not available or the traditional credit report is insufficient, the Feedback Certificate will show a Refer recommendation, and the Mortgagee must manually underwrite the Mortgage”.
Each credit report must include the following from at least TWO credit reporting agencies within the report:
- Name of the lender who ordered the report
- Contact info of the reporting agency
- Name and social security number for each borrower
- Name of the repository for each account listed on the report
The FHA credit report also must include the following information:
- For each debt on the report: (date the account was opened, high credit amount, payment history, the unpaid balance, and the minimum required payment amount)
- Tax Liens
It is a good idea to get a free copy of your credit report to see whether there are any derogatory items that need to be addressed. You should do this months before you begin shopping for a home.
FHA Credit History – Late Payments
The lender will analyze your credit report and late payments will be taken into consideration during the evaluation process. Late mortgage payments are always weighed against you more heavily than late medical payments for example.
If late payments exist, the lender may be required to downgrade your mortgage to a “refer status” and manually underwrite your loan.
Collections and Disputed Items On your Credit Report
FHA credit guidelines indicate that if there are collections or disputed items that total $1,000 or more, the lender may be required to downgrade your mortgage to a “refer status” and manually underwrite your loan.
Excluded from the $1,000 total are non-derogatory disputed accounts and medical disputes or collections.
FHA Credit Counseling
Borrowers can help themselves to improve their credit and make positive changes towards eventually purchasing a home. You can find this counseling through an FHA approved counselor. He or she can provide guidance as to what you can do to improve your credit score and to get your finances in order.
Improving your credit score is a process that does not happen over-night. You can find out more about FHA approved credit counselors by calling 1-800 CALL FHA.
Does my spouse have to be on the mortgage?
Your spouse does not have to be on the mortgage, but lenders are required to run and analyze your spouse’s credit report even if he or she is not going to be on the mortgage.
Can I buy a home with a 500 credit score?
Mortgages are available for borrowers with a credit score of only 500. FHA loans will require a 10% down payment. You can also find a subprime mortgage that is not an FHA insured loan but your down payment requirement will likely be higher.