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FHA Loan Credit Requirements

Key Learnings
  • For an FHA loan, lenders typically require a minimum credit score around 580 or above
  • The FHA’s minimum credit score requirement is 500, but any score below 580 will incur a higher interest rate, up to 10%
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For first time homebuyers, conventional loans may seem out of reach due to high credit standards and other stringent requirements. Fortunately, FHA loans are a great option for borrowers with lower credit scores or limited funds for a down payment.

FHA loans, which are backed by the Federal Housing Authority, give lenders added assurance that the mortgage loan will be profitable. Compared to conventional loans, lenders are able to offer FHA financing to a wider range of individuals who might otherwise be denied.

Although FHA loans have flexible terms, there are still some minimum credit standards that borrowers must meet in order to be approved. This article will guide you through FHA loan credit score requirements so you can be on the same page as lenders when you apply.

What's the minimum credit score for an FHA loan?

Per FHA eligibility requirements, the lowest possible credit score that qualifies for an FHA loan is 500. This is typically lower than conventional loan credit requirements.

However, loans issued to borrowers with scores below 580 are considered “subprime” and represent a higher risk to lenders. As such, many lenders set their own minimum credit score requirements above 500.

Paddio FHA Mortgage Credit Score Requirements

Paddio’s minimum credit score requirement for an FHA loan is 620. The higher your credit score is above 620, the more likely you’ll be eligible for better loan terms, such as a lower interest rate or down payment amount.

Ready to get started on an FHA loan? Get a quote today.

How FHA Loan Credit Requirements Are Determined

Before approving a loan application, lenders need to evaluate the risk associated with the transaction. When an applicant’s ability to repay the loan is questionable, the lender will do one of two things: add a premium in the form of higher interest rates to ensure they will recoup as much of the loan as possible in the early repayment years, or deny the loan altogether if the borrower’s ability to repay is deemed too risky.

Applicants who are faced with a denial due to a low credit score can exhibit compensating factors in order to secure a loan. Compensating factors can include a larger down payment, significant cash reserves or a history of making rent payments that are equal to or higher than the prospective mortgage payment.

How to Get an FHA Loan With Bad or No Credit

While most lenders will be looking for credit scores of 580 or above, there is hope for borrowers with poor or no credit. Generally, credit scores below 580 are considered bad credit and at a higher risk for default. Fortunately, the FHA will still back loans for borrowers with credit scores as low as 500 with some special considerations.

Those with bad credit should be prepared to:

  • Find a lender who will manually underwrite the loan and carefully consider your entire financial position and ability to repay
  • Pay a larger down payment amount of up to 10% to demonstrate your financial responsibility
  • Gather three or more nontraditional credit references to support your application

Of course, just because the FHA will back a loan does not mean that all lenders will overlook the risk of a lower credit score. Lenders may implement more stringent income and employment requirements, or reject the loan entirely until you can increase your score.

If you have no established credit score at all, the FHA also provides lenders some flexibility to get your loan approved. In these cases, you must generally have another co-borrower with a higher credit score (620 or above), and your lender may also have additional requirements, such as credit references or a higher down payment.

Can you get an FHA Loan with a credit score below 500?

Unfortunately, while FHA loans have more lenient credit score requirements than other loan types, there are still limits. The FHA will not provide loans for borrowers with credit scores below 500.

It may take time and energy, but there are several things you can do to improve your credit score, including:

Review your credit report for inaccuracies: Start by getting a free copy of your credit report from each of the three major credit reporting agencies Equifax, Experian and TransUnion. Look for any errors or inaccuracies that might be negatively impacting your score and dispute them with the respective credit bureau.

Pay your bills on time: Your payment history is a significant factor in your credit score. Ensure that you pay all your bills on time, including credit cards, loans, and even utility bills. Setting up automatic payments or reminders can help you stay on track.

Reduce your overall debt: High levels of outstanding debt, especially credit card debt, can hurt your credit score. Work on paying down balances, and try to keep your credit utilization ratio (the amount of credit you're using compared to your available credit) below 30%.

Avoid new credit inquiries: Each time you apply for credit, it can result in a hard inquiry, which may lower your credit score slightly. Try to avoid applying for new credit cards or loans unless absolutely necessary.

Work with a credit counselor: If you're struggling to manage your debt or improve your credit on your own, consider working with a reputable credit counseling service. They can provide personalized advice and help you develop a debt management plan.

Consider a co-signer: If possible, consider applying for an FHA loan with a co-signer who has a stronger credit history. Their creditworthiness could help bolster your application, but remember, they will be equally responsible for the repayment of the loan.

Having a solid credit score will help you get one step closer to securing the home you’ve always wanted. If you're considering an FHA loan, get a quote from Paddio today.

Written by:
Tyler Oswald
Loan Officer Development NMLS #2071128

Tyler brings her expertise of FHA, Conventional and USDA home loans to the team rounded out by a bachelor’s degree in marketing with an emphasis on professional sales.

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