Your credit score is one of the key factors in getting a mortgage. But you can buy a house even if your score is low — especially if you opt for a government-backed mortgage, like an FHA loan.
FHA loan credit score requirements are more lenient than you’ll find with most conventional mortgages, making it easier to become a homeowner even if you’ve struggled credit-wise.
The FHA loan program is designed to help Americans overcome barriers to homeownership, and that includes credit score hurdles.
What is the minimum credit score for an FHA loan?
The minimum credit score for an FHA home loan is 580 if you want a 3.5% down payment.
You may qualify for an FHA loan with a 500 credit score, but you’ll need a 10% down payment. And you might have a harder time finding a lender.
But make no mistake. FHA loans, provided by the Federal Housing Administration under the Department of Housing and Urban Development (HUD), provide affordable loan options to both credit-challenged and high-credit applicants.
The affordable down payment, combined with low mortgage rates and low mortgage insurance premium rates, make FHA mortgages attractive to many buyers.
What if I don’t have the credit score needed for an FHA loan?
If you don’t have the credit score needed for an FHA loan right now, not to worry. There are several ways you can improve your credit score and raise your chances of getting approved:
- Dispute inaccuracies on your credit report: This can lift your lower credit score quickly. Get a free copy of your three credit reports — one from each credit bureau — at annualcreditreport.com. Review each to make sure there are no mistakes or signs of fraud. If you spot an error, contact the bureau to request a change. You can file a dispute with Experian, Equifax, and TransUnion online or through the mail.
- Pay your bills on time: On-time payments are the single most important factor in your credit score. Set up auto-pay to ensure you never miss a due date, or create calendar reminders several days ahead of the deadline so you won’t forget to submit a payment.
- Pay down debts: The amount of credit you’re using also heavily influences your credit score. Pay down high-interest credit cards to reduce your credit utilization ratio and increase your score.
Your credit score won’t skyrocket overnight, but consistently paying bills on time and keeping your balances low will help in time.
If you’re not sure where to start improving your credit, look for a licensed credit counselor in your area or online. A counselor can help you create a plan that can breathe new life into your finances and boost your creditworthiness, helping you reach the 580 minimum credit score you need for an FHA loan and then some.
No, really. My score is bad. What do I do?
Don’t give up hope. Rebuilding credit takes time, but you can do it. In fact, time is on your side: Your negative credit information has less impact as it ages.
Just be sure you’re adding new, positive credit data by making on-time payments and lowering your existing balances. And, when you do get a credit card account paid down, keep the account open.
Having this unused available credit will help lower your credit utilization ratio, which comprises almost a third of your credit score. It also lengthens your age of credit, another important metric that affects your score.
You can add 100 points to your credit score within a year by making on-time payments and disputing inaccurate credit report entries with the three major credit bureaus.
I have no credit. Can I get an FHA loan?
If you’ve never borrowed money before and have no credit history, you may still be able to qualify for an FHA loan.
The Federal Housing Administration allows private mortgage lenders to consider alternative forms of credit history, such as a borrower’s rent and utility payments or phone bills. The FHA’s non-traditional credit check could even include insurance premiums, payments on rent-to-own appliances and furniture, or regular deposits into savings. Lenders can use these payments to show your ability to pay “debt” on time, even though these accounts aren’t the same as what you’d find on a traditional credit report.
The FHA will not consider non-traditional forms of payment history if the payments were automatically deducted, so insurance premiums deducted from your paycheck won’t be much help.
But if you make a point of transferring money into your savings from each paycheck or have a record of on-time rent payments, those could help you qualify for an FHA loan.
Are there any benefits to having a high credit score for FHA?
While FHA loans can open the doors of home ownership to credit-challenged Americans, including first-time homebuyers, it can be a solid option for borrowers who have good credit as well.
But if you have a high credit score, you may save money with a conventional loan.
Conventional loan credit score requirements typically begin at 620, though some private lenders may have higher minimums. And if your credit score is, say, 720 or higher and you have a sizable down payment, you might consider a conventional loan because you can save money on your mortgage insurance payments.
Conventional and FHA loans have different mortgage insurance rules.
With a conventional loan, you pay private mortgage insurance (PMI) until you have 20% equity in the home. If you put down less than 20%, you’ll pay PMI until you hit 20% equity, after which the requirement falls off.
Put down 20%, and you don’t have to pay PMI at all.
FHA loans, on the other hand, require an upfront and annual mortgage insurance premium (MIP) regardless of your down payment amount. If you put down less than 10%, the MIP requirement stays in place for the life of the loan.
If you put down more than 10% on an FHA loan, you’ll still pay upfront and ongoing MIP. But the requirement ends after you’ve made payments on the loan for 11 years.
MIP rates for a 30-year FHA loan
|Loan amount||Down payment||MIP per year||How long you’ll pay|
|$625,000 or less||Less than 5%||0.85%||Life of the loan|
|$625,000 or less||5% – 9.99%||0.80%||Life of the loan|
|$625,000 or less||10% or more||0.80%||11 years|
|Greater than $625,000||Less than 5%||1.05%||Life of the loan|
|Greater than $625,000||5% – 9.99%||1%||Life of the loan|
|Greater than $625,000||10% or more||1%||11 years|
MIP rates for a 15-year FHA loan
|Loan amount||Down payment||MIP per year||How long you’ll pay|
|$625,000 or less||Less than 10%||0.70%||Life of the loan|
|$625,000 or less||10% or more||0.45%||11 years|
|Greater than $625,000||Less than 10%||0.95%||Life of the loan|
|Greater than $625,000||Between 10% and 22%||0.70%||11 years|
|Greater than $625,000||22% or more||0.45%||11 years|
You may be able to refinance out of an FHA loan to a conventional mortgage once you have 20% home equity to eliminate your mortgage insurance premium at that point.
How do lenders know what credit score the lender will pull for me?
Private lenders typically see a different credit score than what you’d see in a free credit monitoring app. Free apps may inflate your credit score compared to your “real” score — think of it as your mortgage credit score.
Your mortgage credit score is often lower than what the app tells you because mortgage lenders must be more stringent. The app isn’t letting you borrow hundreds of thousands of dollars, but lenders are. And, the “free” score likely reflects just one of your three scores from credit bureaus.
For instance, a lender pulls your credit and gets the following scores:
- 685 from Experian
- 672 from Transunion
- 660 from Equifax
Your mortgage credit score for qualification is 672 because it’s your middle score.
It’s not uncommon for someone with these scores to receive a 720 or even 740 as their “free” credit score. But as the saying goes, you get what you pay for.
The best way to know for sure where you stand is to work with an FHA lender that can pull your actual credit score as part of the preapproval process.
The lender may charge a small fee — around $35 — to cover the cost of pulling your credit. But the fee is worth it to find out whether you qualify for an FHA loan and how much home you can afford.
FHA loan benefits in 2021
✓ 3.5% down payment
✓ Use gift funds for down payment and closing costs
✓ Down payment assistance allowed
✓ May qualify with a 50% or higher debt-to-income ratio
✓ Loan limits up to $822,375 in some high-cost areas
FHA loan requirements
FHA loans are among the most inclusive mortgages in the marketplace, but not everyone will qualify.
Along with meeting FHA loan minimum credit score requirements, you’ll need:
- Steady employment: Be prepared to document your employment history for the past two years. You’ll likely need to explain long gaps in work history or frequent job changes
- Primary residence: You can only use an FHA loan for a primary residence, not a vacation home or investment property. You can buy a multifamily home and live in one unit while renting out the others
- No recent foreclosures: Any foreclosures in your credit history must be older than three years
- A down payment: You’ll need at least 3.5% of the home’s purchase available in cash. If your credit score lands between 500-579, you’ll need to put 10% down
- Upfront MIP: FHA loans require an upfront mortgage insurance fee equal to 1.75% of the loan amount. This is due at closing but can be rolled into the loan
- Stay within local FHA loan limits: The FHA sets loan limits each year based on the median home in a given area. You can look up the loan limits for 2021 at HUD.gov
Other types of FHA loans
There’s a lot more to the FHA lending program than traditional single-family home loans. You could also use an FHA loan to:
- Refinance an existing loan
- Refinance a current FHA loan through the FHA Streamline loan program
- Make energy efficient upgrades to your home
- Build a new home
- Finance renovation costs into the purchase price of a home with an FHA 203k loan
- Access equity through a reverse mortgage (age 62 and older)
- Buy a condo, mobile home, or manufactured home
- Rebuild or buy a new home after a natural disaster
Requirements for these and other uses of the FHA program depend on program and lender guidelines.
FHA loan credit score FAQ
Here are some answers to common questions about the FHA lending program.
It’s not uncommon to qualify for an FHA loan with a 620 score. You could also qualify for some conventional loans with a score of 620.
Yes, it is possible, but you’d need to pay 10% down — and you may have a harder time finding a lender that allows this score. Less than 1% of all FHA loans were for buyers with a credit score below 580, according to HUD’s 2020 FHA Annual Report.
You’ll needa 580 credit score to get approved with a 3.5% down payment. You can get approved with a score between 500 and 579, but you’d need a 10% down payment.
FHA loans require mortgage insurance regardless of your down payment size. Along with a 1.75% upfront insurance premium, most FHA borrowers pay annual mortgage insurance throughout the loan’s term unless they refinance to a conventional loan.
Conventional loan borrowers can stop paying mortgage insurance when they’ve paid off 20% of the home’s purchase price, or they can avoid premiums entirely by making a 20% down payment.
An FHA loan is backed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development. The FHA insures the mortgages, encouraging private lenders to give loans to homebuyers who might not qualify for conventional financing.
Conventional loans are backed by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Because they are not government-insured, they tend to have stricter borrower requirements, including higher credit score minimums and lower debt-to-income ratio allowances.
Not necessarily. Monthly payments depend on several variables, including the loan’s term, the interest rate, and the mortgage insurance premium rate.
FHA borrowers must make a down payment of at least 3.5%, and closing costs typically fall between 2-5% of the loan amount. However, you can use down payment and closing cost assistance, or gift funds, to cover those expenses.
Some home sellers agree to help the buyer pay closing costs, though you’d need to negotiate this with the seller before closing. Most buyers roll FHA’s upfront mortgage insurance premium into the loan.
Closing costs are part of any real estate transaction; you can’t avoid them altogether. But you can get help paying for them. Friends, relatives, and even your employer can provide the funds as a gift. You may also qualify for closing cost assistance from local, state, or federal programs.
Your borrowing power will depend on your unique credit profile, debt-to-income ratio, income, down payment amount, and other personal financial details. In most U.S. counties, an FHA loan will not exceed $356,362 in 2021. Loan limits are higher in counties with high home values.
Who can qualify for an FHA mortgage?
Lenders qualify borrowers based on individual financial circumstances. But the general eligibility guidelines for FHA loans include:
- Debt-to-income ratio (DTI) of 50% or less, though some borrowers can qualify with higher DTIs
- Two years of stable work history
- A credit score of 500 or higher
- A down payment of 3.5% (10% if credit score falls between 500-579)
Homeownership within reach
FHA loans make homeownership easier for credit-challenged homebuyers. The credit score required for an FHA loan varies depending on the lender and your down payment amount.
But applying with a credit score of at least 580 may allow you to make the minimum down payment amount of 3.5%, assuming you meet the FHA’s and lender’s other requirements.
And yes, you’ll need to pay the FHA’s mortgage insurance premiums. But those costs can be well worth it to buy an asset that can help you build wealth and stability long-term.
Fairway is not affiliated with any government agencies. These materials are not from HUD or FHA, and were not approved by a government agency.