What Credit Score Do You Need For An FHA Loan?
For borrowers who cannot qualify for a conventional mortgage or whose credit scores prevent them from obtaining a competitive annual percentage rate (APR) on a mortgage loan, a mortgage guaranteed by the Federal Housing Administration – also known as FHA loan – can be a great way to open the door to affordable homeownership.
FHA loans have two major advantages over other types of common mortgage loans. First, the borrower does not need a big advance payment, since 3.5% of the purchase price is all that is required – even with borderline credit qualifications. In addition, down payment funds can come from a donation or assistance program, and most of the other costs associated with obtaining an FHA mortgage can be built into the loan, thereby minimizing the repayable costs for the buyer.
The second big advantage is the flexibility of the FHA credit score requirements. Here’s a quick guide to the current credit score requirements for obtaining an FHA loan, along with other things to consider before deciding if this is the type of mortgage that’s right for you.
FHA Loan Credit Score Requirements
When it comes to FHA loan credit score requirements, there are two different minimums. FICO score depending on the amount the borrower is willing to pay for their down payment, explained here:
- 3.5% deposit: Borrowers who wish to take advantage of the minimum down payment option of the FHA loan need a FICO credit score of at least 580 to qualify.
- 10% deposit: Borrowers who can save at least 10% on their home purchase can qualify for an FHA mortgage with a FICO credit score as low as 500.
Both minimums are significantly lower than what most lenders would consider good or even fair credit. It is therefore fair to say that FHA mortgages are available to borrowers with significant adverse information on their credit reports. This is especially true for borrowers with 10% down payments because a FICO score of 500 is deep in the realm of bad credit.
However, just because a borrower’s score meets minimum requirements does not mean that they will necessarily qualify. On the one hand, credit qualifications are only part of the mortgage approval process. And while the score requirements are flexible, some specific information about your credit history may be unacceptable, such as unpaid collection accounts or unresolved judgments.
When a mortgage lender checks your credit score, they usually pull your FICO scores from the three major credit bureaus – Equifax (NYSE: EFX), Experiential (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 access to the FICO score, but that usually only means one score. If you want to see all three, you will probably have to pay for it. A few places sell credit score access, but myFICO.com is a good place to get all of your scores and is run by the same company that does 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 what you see when you check your score or your lender tells you that you have a lower credit score than your credit card company says, it is probably why.
Looking at my own scores on myFICO.com, my top Equifax FICO score is currently 785. However, the Equifax version most commonly used by mortgage lenders is 751. (Note: a myFICO membership may give you access to all your FICO score versions.)
FHA Credit Score Requirements Versus Conventional Mortgage Credit Standards
A conventional mortgage requires a minimum credit score of 620. That’s the short answer. However, this assumes that the borrower has at least two months of mortgage payments in reserve, is putting at least 25% in funds, and has a debt-to-income ratio (DTI) ratio of 36% or less.
By Fannie Mae’s current underwriting standards, a borrower who only wants to put 5% in funds, doesn’t have a lot of money in reserve, and has a DTI of 36% must have a credit score of 680. And in Depending on the specific borrower’s down payment, reserves and DTI, the minimum score requirements for a conventional mortgage range from 620 to 720.