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FHA Loans

What Credit Score Do You Need for an FHA Loan?

FHA loans can be easier to qualify for, especially with poor credit. Here are the specifics.


[Updated: Feb 04, 2021] Oct 04, 2020 by Matt Frankel, CFP
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For borrowers who can't qualify for a conventional mortgage or whose credit scores prevent them from getting a competitive annual percentage rate (APR) on a mortgage loan, a mortgage guaranteed by the Federal Housing Administration -- also known as an FHA loan -- can be an excellent way to open the door to homeownership at a reasonable cost.

There are two major advantages to FHA loans versus other common types of mortgages. First, the borrower doesn't need a large down payment, since 3.5% of the purchase price is all that's required -- even with borderline credit qualifications. Plus, the down payment funds can come from a gift or assistance program, and most other costs associated with obtaining an FHA mortgage can be rolled into the loan, minimizing out-of-pocket costs to the buyer.

The second big advantage is the flexible FHA loan credit score requirements. Here's a quick guide to the current credit score requirements for obtaining an FHA loan, as well as some other things to consider before deciding if it's the right type of mortgage for you.

FHA loan credit score requirements

When it comes to the FHA loan credit score requirements, there are two different minimum FICO score requirements, depending on how much money the borrower is prepared to put toward their down payment, explained here:

  • 3.5% down payment: Borrowers who want to take advantage of the FHA loan's minimum down payment option need a FICO credit score of at least 580 to qualify.
  • 10% down payment: Borrowers who can put at least 10% down on their home purchase can qualify for an FHA mortgage with a FICO credit score as low as 500.

Both minimums are significantly below what most lenders would consider good or even fair credit. So it's fair to say FHA mortgage loans are available to borrowers with significant adverse information on their credit reports. This is especially true for borrowers with 10% down payments, as a FICO score of 500 is deep into the realm of bad credit.

However, just because a borrower's score meets the minimum requirement doesn't necessarily mean they'll qualify. For one thing, credit qualifications are just one part of the mortgage approval process. And while the score requirements are flexible, certain specific information on your credit history might be unacceptable, such as unpaid collection accounts or unresolved judgements.

When a mortgage lender checks your credit score, they typically pull your FICO scores from all three major credit bureaus -- Equifax (NYSE: EFX), Experian (LSE: EXPN), and TransUnion (NYSE: TRU) -- and use the middle number. So if your FICO scores are 610, 615, and 640, for example, the lender will use 615 as the basis for your qualification.

Many credit cards give borrowers free FICO score access, but this usually only means one score. If you want to see all three, you'll probably have to pay for it. A few places sell credit score access, but myFICO.com is one good place to get all of your scores and is run by the same company that makes the FICO score in the first place.

Finally, some versions of the FICO scoring formula are specifically used by mortgage lenders. So if the FICO score your lender sees doesn't match up with what you see when you check your score or your lender tells you you have a lower credit score than your credit card company says, that's probably why.

Looking at my own scores on myFICO.com, my main FICO score from Equifax currently is 785. However, the Equifax version most commonly used by mortgage lenders is 751. (Note: A myFICO membership can get you access to all your FICO score versions.)

FHA credit score requirements vs. conventional mortgage credit standards

A conventional mortgage requires a minimum credit score of 620. That's the short answer. However, this assumes the borrower has at least two months of mortgage payments in reserves, puts at least 25% down, and has a debt-to-income (DTI) ratio of 36% or less.

According to Fannie Mae's current underwriting standards, a borrower who wants to put just 5% down, doesn't have much cash in reserves, and has a 36% DTI must have a 680 credit score. And depending on the borrower's specific down payment, reserves, and DTI, minimum score requirements for a conventional mortgage range from 620-720.

Some specialized mortgage types, such as a VA loan or USDA loan, have credit standards somewhat more flexible than a conventional mortgage. But not every borrower can obtain them.

Should higher-credit borrowers consider an FHA loan?

An FHA home loan can be a great product for borrowers with credit scores too low to qualify for other types of loans. But what about borrowers who do qualify for conventional mortgage loans with low down payments?

FHA mortgage insurance is considerably more expensive than the private mortgage insurance (PMI) required for low-down-payment conventional loans and tougher to get rid of, which makes the overall cost of borrowing considerably more with all other factors equal. Are there any reasons these borrowers should still consider an FHA loan?

The short answer: yes. Even if a borrower has a strong credit score, there are a few good reasons they may still want to consider an FHA mortgage for their next home purchase.

Borderline credit

While lower-credit borrowers may find FHA loan interest rates somewhat higher than the market average, lenders still tend to give competitive rates to all borrowers because the loans are guaranteed by the government. On the other hand, interest rates can be much higher for lower-credit conventional loan borrowers.

Rates will of course fluctuate over time, but as of the week of September 22, 2020, conventional borrowers with credit scores of 700 to 759 were getting average APRs of 2.733% on 30-year loans, while borrowers in the 620 to 639 range were averaging 4.1%. On a $250,000 mortgage, this translates to nearly $200 more on the monthly payment and over $68,000 in additional interest over the loan term than a top-tier borrower. So if you qualify for a conventional loan but not by much, you may find the cost of borrowing cheaper with an FHA mortgage.

House hacking

If you plan to buy a property with more than one housing unit to live in one and rent out the other(s), known as house hacking in the real estate investing world, you can do this with either an FHA loan or a conventional loan. The difference is that with a conventional loan, you'll need a much higher down payment.

Currently, the minimum down payment for a two-unit property (duplex) with a conventional mortgage is 15%, and for a three- or four-unit property, the minimum is 25%. On the other hand, an FHA borrower can purchase a property with as many as four housing units with the same 3.5% down payment.

If either of these apply to you (or even if they don't), it's still smart to compare your options. Lenders will be glad to give you quotes for both FHA and conventional loans so you can see your choices side by side.

On that note, be sure to fill out mortgage applications with at least a few lenders to shop around for the best interest rate -- you might be surprised how seemingly small differences in interest rates and borrowing costs can translate into thousands of dollars in savings over the long term.

The bottom line

FHA mortgage loans have significantly lower minimum credit score requirements than conventional loans and most other common types of mortgages. If you have a relatively low credit score and are worried about your ability to get a mortgage, an FHA loan could be a great way to make the leap into home ownership.

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