Thousands of borrowers select FHA loans for bad credit every year. If you are shopping for a new home, you may want to consider FHA mortgages insured by the Federal Housing Administration.

Realtors, lenders and home buyers continue to use FHA as the go to loan type for mortgages with bad credit scores. Borrowers have been choosing bad credit FHA loans when they do not meet the fico score eligibility requirements from traditional lenders.

Americans Rely on FHA Loans for Bad Credit when they have Low Fico Scores or Credit Problems in their Past.

bad credit mortgages

The “bad credit FHA mortgage” is a good option for house buyers who have low to moderate incomes, average or low credit scores, and lack a 20% down payment. It’s no secret in today’s lending environment that government mortgage products like the FHA mortgage loan for bad credit, low down-payments and competitive pricing.

While the FHA program offers opportunities for those with damaged credit, it’s essential to seek advice from a trusted lender that has experience securing FHA loans for people with poor credit scores.

Can You Qualify for FHA Loans with Bad Credit Scores?

You can apply to several licensed FHA mortgage companies and not worry about it dinging your credit score. There are still a few second chance loans available in the market today. You can apply for many FHA mortgage loans with bad credit in a 60-day period and it only counts as a single inquiry on your credit report. The credit score requirement for a FHA cash-out plan, may be higher than the streamline option.

Getting an FHA mortgage with bad credit scores is possible, thanks to the Federal Housing Administration’s more lenient lending guidelines. While traditional lenders often require high credit scores, FHA loans can be obtained with credit scores as low as 500, but a score of 580 or higher is ideal.

Here are some steps to improve your chances:

Demonstrating Financial Responsibility: Emphasize your financial stability. FHA Lenders may consider factors such as steady employment, consistent income, and responsible financial behavior.

Build a Larger Down Payment: Increasing your down payment can offset lower credit scores. Having a substantial down payment shows your commitment to the investment.

If you have low credit scores and want to get approved for a bad credit FHA loan  it is not difficult to do for most people. Here’s what you need to do:

#1 Minimum FHA Credit Score Starts at 500

FHA borrowers do not need to have a high credit score. In fact, your score can be quite bad and still qualify with some lenders. However, the minimum score you usually need today is at least a 580. Yes, FHA will insure bad credit mortgages with scores as low as 500 but most approved FHA mortgage lenders implement their own minimum credit scores for FHA programs. (See minimum credit score FHA). Still, some FHA home lenders may continue to work with you if you have a score under 580. If the loan to value is 90% or less, you may be able to get a loan. In that case, you would need at least a 10% down payment.

Review and Improve Your Credit: Start by reviewing your credit report for errors and addressing any outstanding debts. Paying down credit card balances and rectifying any issues can raise your credit score.

If you are applying for a FHA bad credit loan with another applicant, the credit score for the other party also will be considered; the lower credit score is the basis of the credit decision.

There are still a handful of bad credit mortgage lenders that advertise FHA mortgages so relax and do your research. With a such a forgiving minimum credit score requirement, FHA has built a strong reputation assisting people looking to buy a home with bad credit scores.

What do FHA Lenders Consider a Bad Credit Score?

The interpretation of a poor credit score can differ among mortgage lenders. Generally, according to the FICO scoring model, scores below 580 are categorized as “poor” or “bad.” If you are seeking a mortgage with a credit score below 620, it might be labeled as a “low credit mortgage.”

Credit Scores for FHA Loans:

  • 700 or above: Excellent credit
  • 660 to 699: Good credit
  • 600 to 659: Fair credit
  • 500 to 599: Poor credit

Still, some borrowers may be eligible for a FHA loan with a credit score as low as 500, depending on the FHA lenders guidelines. Applicants with damaged credit scores might still be eligible for an FHA loan. However, a minimum down payment of at least 10% is required, and finding a willing lender may pose more challenges.

Another advantageous feature of these home mortgages designed for individuals with bad credit is that, unlike conventional loans, FHA-insured loans do not involve risk-based pricing. Risk-based pricing entails fees imposed on loan applications exhibiting lower credit scores or other less-than-ideal characteristics.

While lower-credit FHA borrowers should expect some FHA mortgage rate adjustments, these are generally considerably lower than the rate increases associated with conventional mortgages. For FHA-loans, bad credit scores do not always dictate higher interest rates.

Don’t forget that FHA requires both an upfront and annual mortgage insurance premium, and this should be factored into the overall cost of the FHA loan.

#2 FHA Down Payment Requirement Starts at 3.5%

One of the best things about an FHA loan is that you do not need to bring 20% down to the table. If you put down only 3.5%, you can usually get an FHA loan for bad credit. Depending upon how low your credit score is will typically dictate if you can get approved with at 96.5% Loan to Value.

If you have a score over 580, there are many lenders that will approved you on a FHA loan for bad credit. If you have a score between 500 and 579 you may be required to come up with a 5 or 10% down-payment depending upon who the lender is.

This is very welcome news for most first time buyers as you may not have much in the way of cash available. If you have a credit score of under 580, you will likely need to have a 10% down payment to get an FHA approval. See today’s FHA mortgage rates.

#3 No Exact Income Requirement

Another benefit of FHA mortgages are that there is no exact requirement for income. The exact income requirements will vary depending upon the lender. However, you do need to provide proof that you have sufficient income to pay your loan.

You also have to show that you have enough income each month to pay for your living expenses and other debt obligations. For most borrowers, the requirement for FHA approved lenders is a maximum of 43%. In a few cases a debt to income ratio of up to 45% can be approved. Learn more about the current FHA income requirements.

#4 Clear CAIVRS Report

A very important requirement for an FHA mortgage is to have a clean Credit Alert Verification Reporting System (CAIVRS) report. This is a federal government system that tracks people who have late payments, have defaulted or been foreclosed for money they owe the US government. This will include federal student loans, FHA mortgages and SBA loans. You also need to not owe any federal taxes to the US government.

But as long as you have an installment plan set up for a delinquent loan or federal taxes, you should be able to still get an FHA loan with poor credit. If you defaulted on an FHA home loan program, you must wait at least three years after the lender was paid off before you can be considered for a bad credit FHA loan again.

#5 Minimum Property Standards Apply

The property you seek funding for can need some repair, but it needs to be inhabitable and meet basic FHA standards. You can use an FHA loan to buy a single family home, condominium, duplex, or townhouse. FHA home loans also can be obtained for buying a manufactured home if all guidelines and requirements are met.

#6 Not Just for First Time Buyers

You do not need to be a first time buyer to get a bad credit mortgage insured by the FHA. You also can use a FHA financing to make energy and home improvements on the property. Yes, first time home buyers with bad credit do have options if they have the income and the down-payment requirement saved.

If you are an FHA borrower over 62 and have a low mortgage balance, you may be able to qualify for a reverse mortgage to use your home’s equity on whatever you need. If you need cash but would rather not refinance, consider a home equity loan with bad credit scores.

#7 Other FHA Requirements

If you have a short sale, foreclosure or bankruptcy on your record, you may be able to get an FHA mortgage loan still. Regulations have changed a good deal on FHA mortgages after the financial-market crash to make it easier for people to buy a home. Getting a mortgage after a BK can be challenging but there are options.

If you had a foreclosure or bankruptcy, you may be able to get a new home loan after only a year. Note that stricter lending requirements will apply, and not every lender will approve you. Still, know that there are options even if you have a serious black mark or marks on your credit file in the last few years.

An FHA loan is easier to qualify for today than ever before. The FHA bad credit loan really is one of the best options for anyone who has poor credit and has recent delinquencies, foreclosures or a bankruptcy on their record. You should know that if you have poor credit, however, not every FHA approved lender will work with you. You might have to apply to several to get an approval.

While FHA does not set exact credit and income standards for FHA loans, the lender can set up their own criteria. So not every person will qualify for every FHA lender’s programs. Learn more about the FHA home loan process.

FHA has been helping families become homeowners with bad credit mortgages since 1934.

bad credit mortgagesTop Four FHA Programs

It is understandable why many home owners and potential home owners are attracted to FHA mortgages with bad credit.

These mortgages, which are backed by the Federal Housing Administration, offer borrowers many advantages:

  • Flexible credit requirements: FHA actually does not set a minimum credit score to get a home loan; individual FHA lenders can and do set minimum credit score requirements.
  • But there are thousands of approved FHA-lenders and bankers across the country.
  • Thus, you can benefit greatly by checking the credit requirements with various lenders.
  • Some licensed FHA-sources allow you to get a bad credit mortgage with a 580 credit score. Talk to licensed lenders and brokers about getting a FHA loan pre-approval.
  • You will find that the minimum credit score requirements can vary dramatically, so do your research.
  • Low down payments: This government program is one of the few FHA loans for bad credit left in the country with very low down payment requirements. For those with a 580 or higher credit score, you may be eligible for a 3.5% down payment. People with lower scores will need to put down 10%.
  • Flexible underwriting: approved FHA-companies have more flexible income requirements than traditional lenders; also, their debt to income ratio requirements are flexible. So if you have moderate income and a lot of debt, you still may be able to get an FHA loan with bad credit.

For the above reasons, it is clear why FHA home loans are very popular in America today. It is estimated that two out of five new home loans are FHA mortgages.

If you are interested in government house financing, be aware of the latest FHA cash out refinance programs that are now available:

1. Fixed Rate FHA Mortgage Options

Without a doubt, the most popular bad credit mortgages will be the fixed rate program as the trend of rates pointing higher on the horizon. This type of FHA product has a low, fixed rate throughout its 30 year or 15 year term.  Interest rates on FHA mortgages for bad credit continue to be advertised competitively in the marketplace.

Many Americans will choose an FHA fixed rate loan this year for the following reasons:

  • The interest rate on the loan can never change, unless you choose to refinance the loan to take advantage of a lower interest rate
  • Your payment is fixed for the entire term of the loan, which makes it easier to plan financially in the coming years. The only part of the payment that can change is the taxes and/or insurance
  • Fixed rate FHA loans are easier to understand and much more predictable than variable rate loans

2. Adjustable Rate FHA Mortgage

Some people choose an adjustable rate FHA loan because the interest rate will be quite a bit lower than the fixed rate loan – at least at first. FHA adjustable rate loans have a low rate for the first one, three, five or seven years, but then will adjust to current market rates.

The adjustable rate FHA program is based upon an economic index that will be stated in the loan documents. Whatever the rate is for that index when it is time for the rate to adjust, your interest rate could go either up or down. Adjustable rate FHA mortgages are considered very attractive for some buyers because they offer a lower mortgage payment at first. This can allow the borrower to buy a bigger or more expensive home.

However, the problem with an ARM FHA loan is that the interest rate is not certain in the future. As long as the interest rates do not rise substantially, the borrower will be fine. But if interest rates rise, and the economy slows down, many ARM loan holders may find they do not have the income to pay their mortgage. This is what happened in the mortgage meltdown, as interest rates reset on ARMs and home owners could no longer afford the payments.

You could be a good candidate for an FHA adjustable rate loan if you are going to sell your home in a few years before the loan resets. Or, you feel confident that your income will be such down the road that you will be able to pay the possibly higher payments.

3. FHA Streamline Refinance

Another very popular FHA refinance program is the FHA streamline refinance program. If you have a current FHA loan and you are on time on your payments, you may qualify for the streamline program that enables FHA bad credit home loans. This could be a smart financial move for you if the interest rates are at least .5% lower right now than your current rate.

If they are, you may be able to refinance your home without having your credit checked, income verified, or even a current home appraisal. In other words, doing an FHA streamline refinance loan can be extremely easy and take only a few weeks. The streamline refinance program is a good option if you want to reduce your monthly payment by as much as $200 or even more.

4. FHA 203k Home Improvement Loan

The FHA 203K loan allows you to borrow cash with one loan for both your home purchase and for rehabbing the property. This type of FHA mortgage can be a good fit for the buyer who wants to buy an older home with potential, but in need of repair. The 203k loan problem can fund both the purchase and repairs and temporary housing while the home is being rehabbed.

This type of loan is fairly easy to qualify for, but you do need to have a full rehab project laid out by a licensed contractor and approved by FHA. There are not many equity loans available for people with below-average credit, but consider a second mortgage for bad credit if you do not meet the eligibility requirements for the 203K program

Takeaway on FHA Loans for Bad Credit

The above are some really good and popular bad credit FHA loan opportunities that could be a good choice for you. Get organized and speak with a few FHA mortgage companies before making an offer on a new house or pulling the trigger on a refinance.

Find out how much you can afford and potentially how much that you can save by reducing your housing expenses with an affordable FHA loan.