Guide to FHA Home Loans: What Credit Score Do You Need for an FHA Home Loan?


What is the “real” credit score required for FHA mortgages?

If you look at the FHA mortgage guidelines or the articles online, you will see that the minimum credit score for the FHA is 500 or 580.

It’s pretty low, but that’s not the whole story either.

Check your FHA loan eligibility (September 19, 2021)

Can You Really Get an FHA Home Loan With a FICO of 500?

The short answer is, yes you can. However, you must learn the distinction between a low credit score and bad credit. You can have a low credit score without it being your fault.

You may be young with a short credit history. Or you could just not use credit.

7 low-credit mortgages

Alternatively, you can use what looks like too much credit even if you pay your bills on time.

These scenarios are different from those in which the applicant does not pay their bills on time, if at all. You might get approved with low scores if your actual credit history isn’t great.

Realistically, only about one percent of FHA approvals go to applicants with FICO scores between 500 and 549.

Low credit score vs. Bad credit

The FHA guidelines say lenders should assess the borrower’s past debt management because it is a good predictor of how an applicant will pay off the new mortgage. Its guidelines are as follows:

“Past credit performance is the most useful guide for

  • determine a borrower’s attitude towards credit obligations, and
  • predict the future actions of a borrower.

Borrowers who have made payments on past and current obligations on a timely basis represent reduced risk.

Conversely, if a borrower’s credit history, despite having sufficient income to cover the obligations, reflects continued slow payments, judgments, and overdue accounts, significant compensating factors will be required to approve the loan.

No credit score

Not having traditional accounts shouldn’t prevent you from getting an FHA loan. Read the FHA guidelines,

“The lack of a credit history or the borrower’s decision not to use the credit cannot be used as a reason for rejecting the loan application. “

The lender simply compiles a non-traditional credit report using utility payments, rent, and even a series of regular savings deposits. It shows whether you are managing debt responsibly or not.

Can you buy a house with a 580 credit score?

FHA says,

“When assessing a borrower with a non-traditional credit history, a satisfactory credit history, lasting at least 12 months, should include

  • no history of delinquency on rental housing payments
  • no more than a 30-day delay in payments owed to other creditors, and
  • no collection account / court record report (other than medical) filed within the past 12 months.

When you don’t have traditional credit, you need to be more mindful of cash receipts, bad checks, and the like. This is because they will have a disproportionate effect when there are no other accounts to offset them.

Check your FHA loan eligibility (September 19, 2021)

Lender overlays

While the FHA allow lenders to approve loans with low FICO scores, it does require them to.

FHA lenders may require minimum scores ranging from 600 to 680, although the FHA’s own guidelines are more flexible. This practice is called “lender overlay”.

Why overlays?

Doesn’t FHA Protect Lenders Against Losses? Yes, FHA mortgage insurance premiums (paid by borrowers, not taxpayers) cover lenders in the event of borrower default.

However, if FHA lenders have too many claims against FHA insurance, they can lose their FHA approval. And it doesn’t matter if the bad debts were written according to FHA guidelines.

Beat overlays for FHA, VA, HARP and USDA mortgages

FHA loans are a big part of the business of many lenders, so no lender wants to lose their approval. That’s why lenders are adding requirements to minimize the risk of mortgage default.

Requirements Fall as rates rise

One of the reasons that lenders were so hard on applicants in the past is that they had more business than they could handle. So there was no reason for lenders to approve less than perfect candidates.

As rates rise, however, lenders tend to lower their standards somewhat. The median credit scores of approved mortgage applicants have steadily declined over the years.

For future homeowners with dilapidated credit scores, the best solution right now is to simply contact more mortgage lenders. This increases your chances of getting the loan you want and paying less.

Check your FHA loan eligibility (September 19, 2021)

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