What Credit Score Do You Need to Get an FHA Loan?
To qualify for an FHA loan, you need a credit score of at least 500. But it’s important to note that there are other requirements you have to meet as well. We’ll cover those requirements and more in this post.
What it takes to get approved for an FHA loan
Since 1934, government-backed FHA loans have made the dream of homeownership more accessible for people with less-than-stellar credit and a modest savings account. These mortgage loans are issued by private lenders and insured by the U.S. Federal Housing Administration, making it possible for your average borrower to purchase a reasonably priced home with a down payment as low as 3.5%.
In order to qualify for maximum funding from the FHA, you’ll need a FICO Score of 580 or above. If you meet this credit threshold, you’ll only need a down payment of 3.5%. Given that credit scores of 580 to 669 may be considered subprime, consumers in this range will likely find it difficult to qualify for a non-FHA mortgage loan with a similar down payment and interest rates — if they can qualify at all.
If your credit score is below 580, you may still qualify for an FHA loan, but you’ll have to make a larger down payment. Borrowers with credit scores between 500 and 579 are limited to 90% financing through FHA loans, which means they have to put down 10%. Still, if your credit score falls within this range, FHA loans are likely your most affordable — or only — option for a mortgage loan.
Unfortunately, if your credit score falls below 500, you’re not eligible for FHA loans at all. However, with time and diligence, it’s possible to rebuild your credit score.
In addition to credit score requirements, you’ll also need to meet the following minimum FHA loan requirements as established by the Federal Housing Administration. These requirements are current as of 2019:
- Debt-to-income ratio: Your front-end debt-to-income ratio — or your housing costs (including mortgage payments, mortgage insurance and property taxes) divided by your gross income — cannot exceed 31%. Your back-end debt-to-income ratio — or all of your debt (including mortgage, credit card debt and other loans) divided by your gross income — cannot exceed 43%.
- Income and employment: You must be able to show steady income and employment for the past two years. Documentation such as pay stubs, W-2s and tax returns will be used to verify your income.
- Property: Regardless of the property you plan to purchase, it must be your primary residence for at least a year. This means you can’t use an FHA loan to purchase a vacation home or second home.
- Mortgage insurance: You’re required to pay for mortgage insurance if you take out an FHA loan, even if you make a larger down payment. This is explained in more detail below.
Pros and cons of an FHA loan
While FHA loans can be the most affordable option for some borrowers, other borrowers might find that they’re more expensive than conventional mortgage loans. It’s important to weigh the benefits and drawbacks of FHA loans before making a decision.
Easier to qualify. Because they only require a FICO Score of 500 or above, FHA loans are easier to get than conventional home loans. Generally speaking, you’ll need a FICO Score in the mid-700s or above in order to qualify for the best mortgage loans. If your credit score is in the mid-600s or below, it may be difficult to find a lender who will approve you for a conventional mortgage loan at all.
Lower down payments. People often assume they can’t afford to buy a home because they don’t have a 20% down payment saved up. With FHA loans, you only need to save 3.5% to 10%, depending on your credit score. Most conventional mortgage loans require a minimum down payment of 5%, and that’s for the most creditworthy borrowers.
Affordable interest rates. While FHA loans don’t offer the lowest rates possible on mortgage loans, they are affordable and lower than the rates on subprime mortgages, or mortgages designed for people with fair to poor credit.
Upfront mortgage insurance premium. The FHA mitigates the risk of insuring borrowers with lower credit scores by charging mandatory mortgage insurance on FHA loans, otherwise known as an upfront mortgage insurance premium. This will include both an upfront cost that’s included in your closing costs and a monthly premium.
Not all properties are eligible. In order to qualify for an FHA loan, the property you’re interested in must meet the U.S. Department of Housing and Urban Development’s Minimum Property Standards, which are more stringent than your typical building code. Specifically, there are high standards for the durability of any property that is FHA-insured because the home’s value serves as collateral for a somewhat risky loan.
More expensive if you have good credit. If you can qualify for a conventional loan, they typically come with rates that are 1.5 to 2 points lower than rates for FHA loans. These lower rates are usually available to borrowers with good or excellent credit (a FICO Score of 670 or above) who can afford a down payment of 10% to 15%.
Other options for mortgage borrowers with poor credit
If you have bad credit and want to purchase a home, an FHA loan isn’t necessarily your only option. Other home loans for people with poor credit include:
- VA loans: Home loans for veterans that are backed by the U.S. Department of Veterans Affairs
- USDA loans: Home loans for houses in rural areas that are backed by the U.S. Department of Agriculture
- Fannie Mae HomeReady program: Home loans for people without a substantial credit history that consider non-traditional credit sources like rent payments and certain monthly bills
Whether your credit report is a little too colorful or doesn’t exist at all, you have options when it comes to buying a home. Some of these options — such as FHA loans — are also affordable. However, it’s important to recognize that you will likely get better rates with a higher credit score. If you can, consider repairing your credit before you apply for a home loan. It could save you money in the long run.