FHA Credit Score: What to Know About FHA Requirements

If you’d like to buy a home, chances are you’ll need a home loan to make it happen. Depending on your financial situation and credit history, a Federal Housing Administration (FHA) loan may be your best bet. FHA loans are backed by the government and come with flexible conditions and requirements that allow more people to qualify to buy a home.

You’ll still need to focus on improving or maintaining your credit score before you start looking at dream home listings — there are FHA credit requirements you’ll need to meet or exceed to get funded. Credit history is one of the most important factors for getting a home loan, so it’s important to know about the FHA credit score requirements and what you can do to improve yours.

What is an FHA loan?

An FHA loan has less stringent requirements than a conventional home loan to make borrowing easier for first-time homebuyers or those with lower income. FHA loans are most beneficial for buyers who are unable to save enough to put 20% down on the purchase of a house, which is the optimal amount you’ll need to put down if you go with a conventional home loan.

FHA loans have two unique features — you’ll only need a minimum of 3.5% as a down payment toward the home and an FHA credit score minimum of 580, which is much lower than the credit score most lenders require to qualify you for a conventional mortgage. You may even be able to get approved for a mortgage with an FHA credit score of 500 if you’re able to put 10% down toward the purchase of the home (plus closing costs).

Aside from the down payment and FHA credit requirements, there isn’t much more to note as far as requirements go. You can use an FHA home loan to refinance your existing home or purchase different kinds of real estate, including:

• A single-family home
• A condominium
• A multifamily home (two to four units)
• A manufactured or mobile home

The maximum FHA loan limits — which will dictate how much you can borrow to purchase your home — will depend on where you live. In 2020, the maximum loan amount ranges from $331,760 to $765,600 (if you’re in a high-cost area). If you believe you meet down payment and FHA credit requirements, you can get this type of federally-backed loan through most lenders.

Benefits of FHA loans

FHA loans are incredibly popular because of their flexibility. The top three benefits of an FHA loan include:

FHA loans are easier to qualify for.

FHA credit requirements and down payment amounts are set lower, making this type of federally-backed home loan more widely available than other types of home loans. If your credit history is fairly new or less-than-perfect, you can still get approved for a mortgage with an FHA loan, which is a huge draw for this type of loan.

There are plenty of lenders offering this type of loan.

It’s easy to find a lender that offers FHA loans. Most large and small lenders, including Chase, Citibank and Bank of America, offer FHA loans. Ready to start narrowing down lenders? You can consult the official lending list for a complete list of FHA lending partners.

These loans often come with lower interest rates.

FHA mortgage rates are typically lower than conventional loan rates. The current FHA mortgage interest rate for a 30-year fixed loan is 2.25%, which is extremely low. A lower interest rate typically means lower interest payments, saving you a significant amount of money over the life of the loan.

Higher amounts of debt is OK in some cases.

Conventional mortgage lenders will expect your debt to income ratio, the amount of debt you carry compared to how much you make, to be low. FHA loans allow you to carry a larger amount of debt of up to 43%, which is good news for recent graduates with student loans or for people with other types of debt.

Drawbacks of an FHA loan

Although an FHA loan sounds perfect, it’s not for everyone. The FHA loan program has its drawbacks.

There are higher closing costs to consider.

Choosing an FHA loan so you can make a lower down payment will cost you. Aside from the standard closing costs, you’ll need to agree to pay a mortgage insurance premium (MIP) of 1.75% of the loan amount before your lender hands over your new home’s keys. When looking at the best mortgage rates, you’ll notice interest rates may be lower with FHA loans, but if you look at the annual percentage rate (APR) of an FHA loan, it’s much higher to reflect the additional fees it comes with. The current 2.25% interest rate for an FHA loan has an APR of 3.198%.

That required MIP insurance is pricey. 

Besides the upfront expense, you’ll also have to pay for MIP every year, too. That monthly MIP cost will factor into your monthly mortgage payments, raising the price of this type of loan — in many cases significantly.

How credit scores affect FHA loans

You’ll need a good credit score to qualify for a conventional loan. If you have poor to fair credit, you have two options — hold off on buying a home while you pay down debt and work toward improving your credit score, or apply for an FHA loan.

Although the FHA is more forgiving of your credit history, it doesn’t mean you can completely neglect it. Your credit history represents how responsible you’ll be about making your mortgage payments on time. The lender you’re working with will still review your credit history and look for red flags, such as collections, unpaid bills and judgements against you — even for an FHA loan.

The steps you should take toward improving your credit and get ready for a home loan include:

• Order a free annual credit report and review it for any errors or missing information
• Dispute any invalid or incorrect information on your credit report
• Start paying down your debts
• Keep credit card balances as low as possible before you apply for a loan
• Avoid opening any new lines of credit, loans or credit cards before you apply
• Spend responsibly to avoid debt you can’t afford

Credit score requirements for FHA loans

Bumping up your score can make all the difference in the world — if your credit score is at least 500, you can still get approved but FHA credit requirements will mean you’ll need to put down a larger down payment of 10% or more depending on the lender. If you can increase your credit score to 580, you’ll only need to put 3.5% down.

If you can’t afford a larger down payment, you’ll need to work on having the highest FICO possible when you apply for a loan. If you can’t get your credit score to at least 580, you might still be able to qualify — the FHA doesn’t limit how you obtain the down payment. You can receive the money as a gift from family or even apply for a grant through your local first-time home-buyer program.

In the end, your best bet is to try and improve your credit score to at least 580 if you’re having issues finding enough cash for a 10% down payment.

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