One of the most common questions we hear all the time is: What are the FHA credit score requirements?
For years there was “No minimum credit score for FHA loans.” A few years back, HUD made some guideline changes and instituted a 500 minimum credit score for FHA programs.
Keep in mind that most lenders, brokers or banks will implement their own FHA minimum credit score requirements and in most cases its higher than 500. You see, the Federal Housing Administration allows HUD approved lending companies to add layers to the baseline FHA loan requirements.
Anyone who wants to buy a home and has credit challenges will likely be considering a loan that is guaranteed by the Federal Housing Administration or FHA.
These FHA first time home loans are quite easy to qualify for and open the possibility of home ownership for millions of people who otherwise would have trouble qualifying for a loan.
As of today, you need to have a credit score of at least 500 to get a home loan from FHA. If you want to make the minimum down payment of only 3.5%, you will need a credit score of 580 or higher.
However, poor credit borrowers should realize that many FHA approved lenders will require you to have credit scores of 620 to 640 to get an FHA mortgage loan. Individual lenders have the flexibility to have stricter lending criteria.
Some experts think that FHA may ease lending standards more in 2017 and this could allow hundreds of thousands more families to buy a home.
How Was FHA’s Policy Updated?
FHA recently added another type of evaluation of potential lenders. The current policy has been to compare an FHA mortgage lender with another FHA lender in the same part of the country. This is called the FHA compare ratio.
If the lender had 150% more loans that paid late than other lenders in the region, it could get removed from the FHA approved lender list.
Many lenders had a problem with this standard. If some lenders in the area have higher FHA credit standards than theirs and a lower default rate, other lenders in the area would look worse.
This led to lenders increasing their minimum score required as high or higher as other lenders in the area. So the credit standards continued to creep up, which goes against the purpose of the entire FHA mortgage program.
Under this system, an FHA lender could be kicked off the FHA program if the lender across town raised its credit score minimum to 680 from 640.
Now, there is another layer of evaluation by FHA. The Federal Housing Administration will look separately at loans that are paid late based upon credit scores of under 640; between 640-680 and more than 680.
This should help borrowers with lower credit scores to qualify for loans. The lender will no longer risk losing its FHA approved status if its lower credit score loans perform in similar fashion to other loans in the same score bracket. Also, the comparison is going to be made around the country and not just in a single geographic area.
Under the new rules FHA will compare a lender’s higher default rate with lower credit score loans to the national average for all loans under 640. This makes it more likely that the lender will be able to continue to do business with lower credit score borrowers.
Keep in mind that it may take time for the new FHA policy to be rolled out. Lenders often wait for other lenders to implement the new guidelines to see how things shake out.
If you are a lower credit score borrower, you could be talking to some lenders who have adopted the new standard while others have not. So. It will pay to shop around and get quotes from several lenders.
Why People Turn to FHA Mortgage Loans
Conventional loans that are offered by Fannie Mae and Freddie Mac are good products but they are fairly strict on lending criteria. If you have credit under 700, you may have difficulty getting a loan approved.
FHA allows many more people to get approved for a loan with these criteria:
- Poor credit from 500 to 620
- Low income
- Income from several sources
- Co-borrowers who may not live in the home
- Ability to get down payment from gift funds
- Homes that need repairs
Without FHA, many more American families would have to pay rent for many years more. However, there are still ways that FHA can expand home ownership to more Americans.
Another very helpful part of the FHA program today is that it recently increased the maximum loan amount that FHA will insure to $424,100. So even if you are buying a quite expensive home, you may be able to get an FHA loan. If the home is in an expensive area such as California, the maximum FHA loan limit is $625,000. So with even expensive homes in expensive areas of the US, an FHA loan is still a good possibility.
The Bottom Line
Anyone with poor to average credit who wants to buy a home should talk to several FHA lenders right away. If you have a credit score at least in the low 600’s, you should be able to find many FHA approved lenders who can get you approved for a mortgage.
It will always benefit you to talk to a lot of lenders because some lenders may be able to offer you a lower rate on a certain loan product. FHA approved lenders have considerable leeway in their lending criteria.
Even if you have a credit score that is under 600, do not lose hope. There are still some FHA mortgage companies out there who may approve your loan. Under the new lending criteria mentioned above, there will probably be even more FHA approved lenders in 2017 and beyond that will work with poor credit borrowers.