6 Min Read | July 1, 2022
What’s the Minimum Credit Score Needed to Get an FHA Loan?
Technically, FHA loans require a minimum credit score of 500. But many lenders require higher credit scores – especially if you want to qualify for a 3.5% down payment.
At-A-Glance
An FHA loan can help trim your down payment on the purchase of a new home to as low as 3.5%, but only if your credit score is at least 580.
If your credit score is as low as 500, you may still qualify for an FHA loan with a down payment of 10%.
However, many lenders require credit scores that are higher than the FHA’s minimums.
For many people hoping to purchase a new home, saving for the traditional 20% down payment can be tough, especially as housing prices have risen in many parts of the U.S.1 That’s why many homebuyers apply for Federal Housing Administration (FHA) loans. These government-backed mortgages are insured by the FHA and allow eligible borrowers to put down as little as 3.5%.
If you’re looking to purchase the home of your dreams with a small down payment, your credit score will play a key role in determining whether you qualify for an FHA loan. But what is the minimum credit score needed to qualify? And credit score aside, is an FHA loan the right choice for you?
What Is an FHA Loan?
An FHA loan is a home mortgage backed by the U.S. government. The FHA itself doesn’t provide mortgages but, rather, insures mortgages issued by FHA-approved lenders, including banks and credit unions. The insurance protects these lenders in the event that a borrower defaults on a mortgage.
FHA loans can be used to buy or refinance a variety of residential properties, including single-family houses, multifamily homes, and condos. Certain types of FHA loans can also be used to finance new construction or pay for renovations on existing homes.
FHA loans are especially popular with first-time homebuyers who have limited savings.
The Minimum Credit Score Needed for an FHA Loan
FHA loans have historically helped low- to moderate-income families attain homeownership – hence, the low down payment. They may also allow for more lenient credit scores than the minimum 620 FICO score typically required for many conventional home loans. To qualify for an FHA loan with a 3.5% down payment, for example, you’ll need a minimum FICO credit score of 580. If your credit score is lower – between 500 and 579 – you may still be eligible for an FHA loan, but you’ll need to make a higher down payment of 10%.
One key caveat: While these FICO scores are the minimum credit requirements set by the FHA, borrowers with credit scores between 500 and 580 may have a hard time securing an FHA loan.2 That’s because many FHA-approved lenders still look for a FICO score of at least 620 to qualify – and the FHA can’t force banks to conform to the agency’s lower FICO score requirements. (The FHA relies on FICO scores, rather than VantageScores.)
Why You Should Establish a Solid Credit Rating
The FICO score on your credit report isn’t the only factor the FHA considers. The agency also looks at your payment history and any past history of bankruptcies and foreclosures. However, the agency may consider extenuating circumstances, such as a job loss or injury, so if your credit report has a sore spot or two, you may still qualify for an FHA loan.
Nevertheless, many mortgage experts suggest that anyone hoping to purchase a home in the near future may want to work on establishing the best credit rating possible.3 The FHA requires your recent credit history to be in good standing, and many lenders want to see that borrowers have made reliable payments on debts for at least a year.4 Plus, in many cases, the higher your credit score, the lower your interest rate.
How to Get an FHA Loan
The FHA doesn’t offer loans directly, so you’ll have to apply through a private lender, such as a bank or credit union. Generally, FHA loans entail the following requirements:
- Credit score: While the FHA has set the minimum credit score at 500, many FHA-approved lenders require higher minimum FICO scores of at least 620.
- Down payment: While obtaining an FHA loan requires you to make a down payment, that payment doesn’t necessarily have to come from your savings account. Gifts are also acceptable, as long as you can demonstrate that you’re not expected to repay those funds to the donor.
- Debt-to-income ratio: Your debt-to-income ratio weighs how much money you owe against how much you earn. The FHA allows you to use 31% of your income toward housing costs and a total of 43% of your income for housing expenses plus other debts.5
- Mortgage insurance premiums: Borrowers who take out FHA loans are required to pay mortgage insurance premiums, which are often rolled into the total amount of the loan and paid on a monthly basis.
- Property requirements: The home must be the borrower’s primary residence. In 2022, FHA loan amounts cannot exceed between $420,860 and $970,800, depending on location.6 Loan limits vary by county, with higher limits in sections of the U.S. where housing is more costly. The FHA also requires an appraisal of the home to make sure the house is worth what the borrower is paying and has no safety issues.
- Personal and financial paperwork: The borrower must have a valid Social Security number, earn a steady income, provide documentation related to employment, and show proof of U.S. citizenship, legal permanent residency, or eligibility to work in the U.S. In addition to running credit checks, lenders also request recent bank statements.
A Brief History of FHA Loans
During the Great Depression, American homeowners defaulted on their mortgages in large numbers, prompting the creation of the FHA in 1934 to curb foreclosures and assist Americans with homeownership. As the largest insurer of residential mortgages in the world, the FHA has insured tens of millions of properties in the U.S. since its creation.7 In November 2021, the U.S. Department of Housing and Urban Development reported that the FHA had active insurance on more than 7.8 million mortgages.8
FHA Loan Alternatives to Consider
While FHA loans come with the advantage of lower down payments, homeowners may want to consider a potential downside: the cost of mortgage insurance premiums. The up-front premium is 1.75% of the loan amount, which can be rolled into your monthly loan payments or included in your closing costs. You’ll also have to pay a monthly premium – 0.45% to 1.05% depending on the loan terms – that’s added to your mortgage payments.9 While borrowers who make a 10% down payment will see these insurance premiums expire after 11 years, homeowners who put down 3.5% will make mortgage insurance payments for the life of the loan.
Conventional mortgages, on the other hand, typically require borrowers to pay private mortgage insurance (PMI) premiums when they make down payments of less than 20%. But that expense is temporary. Once you’ve reached 20% equity in the home – either because you’ve paid down your loan balance or because home values have risen in your area – you can have the PMI removed from your mortgage. And if you’re able to put 20% down on the home from the get-go, you don’t have to pay for PMI.
If a conventional mortgage isn’t right for you, it might be worth exploring other mortgage options, including ones that require little to no down payments, and weighing the total costs. For example, the government insures different loans for specific demographics. The Department of Veterans Affairs (VA) guarantees mortgages issued for veterans and certain surviving spouses. These VA loans may not require a down payment, nor do they require mortgage insurance. Similarly, the U.S. Department of Agriculture (USDA) offers loans for homes in certain rural areas for low-income borrowers, and these loans do not require a down payment.
The Takeaway
If you’re looking to buy a home, FHA loans with low down payments may be an attractive option to consider. To qualify for an FHA-insured loan, you need a minimum credit score of 580 for a loan with a 3.5% down payment, and a minimum score of 500 with 10% down. However, many FHA lenders require credit scores of at least 620.
1 “Housing Prices and Inflation,” The White House
2 “The Facts About FHA Requirements and FICO Scores,” FHA.com
3 “There Have Never Been More Ways to Build a Credit Score. Here’s What to Know,” CNBC
4 “FHA Loan Requirements,” FHA.com
5 “FHA Debt-to-Income Ratio Requirements,” FHA.com
6 “Maximum Mortgage Limits, 2022,” U.S. Department of Housing and Urban Development
7 “Federal Housing Administration,” U.S. Department of Housing and Urban Development
8 “FHA Releases 2021 Annual Financial Report to Congress,” U.S. Department of Housing and Urban Development
9 “FHA Requirements,” FHA.com
Dina Gerdeman is a business writer and editor based in the Boston area.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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