Low credit score borrowers may be eligible for FHA loans, thanks to a new 2017 FHA policy update. Since 2017, lenders have loosened credit score requirements.
These new credit score requirements are intended to put home ownership within reach for lower-credit score borrowers.
What are FHA credit score requirements in 2024?
The Federal Housing Administration (FHA) requires a credit score of at least 500 to buy a home with an FHA loan. A minimum of 580 is needed to make the minimum down payment of 3.5% of the total loan amount. However, some lenders require a score of 620 to 640 to qualify.
Thanks to a new 2017 FHA policy update, many lenders have reduced their FHA minimum credit score requirements, opening homeownership to thousands more buyers.
Analysts predict the change could allow 100,000 additional families per year to buy a home with an FHA loan.
Since its inception in 1934, the FHA loan program has enabled more than 40 million families to buy or refinance property. Its extreme popularity is a direct result of its flexibility. The program was built from the ground up to promote homeownership among a portion of the population that would not otherwise qualify.
What credit score do you need to buy a house?
It’s possible to get an FHA loan with a credit score of 580 or 500, depending on the size of your down payment. VA, USDA, and conventional loans do have a set minimum credit score but lenders will generally require a credit score of at least 620.
Of course, remember that the minimum square will tell you what’s required to qualify, but a lower credit score also usually means higher interest rates.
This table outlines the minimum credit scores typically needed to buy a house based on the type of loan: conventional, FHA, VA or USDA.
|Loan Type||Minimum FICO Credit Score||Intended For|
|FHA||580 with a 3.5% down payment or 500 with 10% down||Homebuyers with low- to moderate-income|
|VA||No set minimum from the VA although most lenders will require a 620 or higher credit score (some may allow a score as low as 580)||Veterans & active military|
|USDA||No set minimum from the USDA although most lenders will require a score of at least 640||Buyers purchasing a home in a designated rural area|
|Conventional||620 to 640||Buyers who want a traditional mortgage|
FHA beats conventional loan flexibility
Conventional loans offered by mortgage giants Fannie Mae and Freddie Mac certainly have their place in the market. But they are not very flexible regarding certain loan criteria. FHA fills in the gaps by offering mortgage approvals to those with:
- Medium to low credit
- Lower income
- Income from numerous sources
- Co-borrowers who do not plan to live in the home (non-occupant co-borrowers)
- Down payment gift money, but no down payment of their own
- Properties that are in need of repair
Without FHA, millions of homeowners would be stuck renting years longer than they should. Yet, there is still room for FHA to expand its capacity to serve more aspiring homeowners.
FHA lenders don’t always follow FHA credit score minimums
Banks and mortgage companies that offer FHA loans are not required to follow FHA guidelines to the letter.
These are private, for-profit companies that simply approve loans based on guidelines provided by the government agency. But most important to the lender is whether a borrower will be able to make the monthly payments for the loan amount, which means they will evaluate your personal finances more holistically, and will look at factors besides your credit score, including your monthly income and debt-to-income (DTI) ratio.
Many lenders across the country impose tougher guidelines for FHA loans than the FHA itself. It doesn’t seem to make a lot of sense until you realize that FHA penalizes lenders for approving too many bad FHA loans.
Statistically, borrowers with lower credit scores default more often. That’s why many lenders require a higher minimum credit score than the FHA.
Here are credit score minimums as stated by FHA:
- Credit score at or above 580: Eligible for 3.5% down payment
- Credit score of 500-579: Must put 10% down, but still eligible
- Credit score below 500: Not eligible for FHA financing
Most lenders require a score of at least 620-640. But that number could drop closer to FHA’s published minimums because of the updated policy.
FHA policy updates have made it easier for low-credit borrowers to qualify
In 2017, the FHA added another layer of evaluation to their current method of identifying high-risk lenders.
The FHA’s sole method was to compare an FHA lender with other FHA lenders in the same geographical region. This is known in the lending world as the FHA “compare ratio.”
If a lender had 150% more late-paying loans than other area lenders, it was at risk of getting kicked off of the FHA’s approved lender list.
Many banks and mortgage companies had a problem with this method. If nearby lenders had tougher FHA qualification standards and therefore a better book of loans, other area lenders would look comparatively worse.
In theory, an FHA lender could be shut down because the FHA lender across the street raised its minimum credit score requirement from 640 to 680.
This can and did lead to an escalation of sorts – lenders raised their minimum FHA credit score requirements as high or higher than their competitors. FHA’s own policies counteracted its mission to provide access to homeownership to less-than-perfect borrowers.
While the FHA did not end the “compare ratio” method altogether, it added another layer of evaluation.
Now, the FHA separately examines late-paying loans based on the borrowers with credit scores of:
- Less than 640
- Between 640 and 680
- Greater than 680
How does this help borrowers with lower scores?
A lender is no longer at risk of losing its FHA credentials if its lower credit score loans are performing similarly to loans within the same credit score bracket. In addition, the comparison will be made nationwide, not just in the lender’s geographical region.
Here’s how it might look in real life. Lender X issues 100 loans to borrowers with scores below 640. Three qualifying borrowers eventually stop making their payments, giving Lender X a “bad loan” rate of 3%.
Lender Y across the street issues 100 loans to borrowers with scores above 680. Only one doesn’t pay his mortgage, giving Lender Y a default rate of 1%.
Under the old rules, Lender X might be in trouble. His “compare ratio” is 300% — double the acceptable level. At this point, Lender X raises its minimum FHA credit score to 680.
Under the current rules, Lender X might be just fine, because FHA compares its default rate to the national average for loans with credit scores below 640.
Now, Lender X can continue helping underserved home buyers, in tune with FHA’s core mission.
In short, this policy may help to maintain the number of lenders available to borrowers with credit scores that do not meet the minimum requirements of non-FHA loans.
When can lower credit score borrowers apply for an FHA loan?
The policy has been rolled out for a few years (since 2017), so your chosen lender may have changed its internal policy already.
Typically, there’s a step-down effect across the lending landscape. One lender will slightly loosen guidelines, followed by others until a majority function similarly. If the new standards work, lenders loosen a bit more.
FHA loan FAQs
What credit score do you need to buy a house?
There is no legal minimum credit score required to qualify for an FHA home mortgage. However, most FHA loans generally require your FICO score to be at least 500-580. The specific numbers required are often considered jointly with the size of the down payment. VA, USDA and conventional loans usually require a minimum credit score of 620-640.
What credit score do you need to buy a house for the first time?
There is a selection of mortgage loan programs intended for first-time homebuyers that allow for lower credit scores, including FHA loans available for borrowers with scores as low as 500 (though such loans will require a downpayment of 10%). FHA loans — with just a 3.5% downpayment — are available to borrowers with a credit score of 580 or higher.
Can I get a home with a 500 credit score?
Technically, yes, though it is difficult. Because there is no law stipulating a minimum credit score needed to buy a house, a lender can, generally speaking, offer loans at their discretion, no matter the borrower’s credit history. Still, it’s increasingly rare for lenders to approve home mortgages for borrowers with credit scores of 500. An FHA loan is likely to be the only type available in this scenario, and most FHA loans given to borrowers with a credit score of 500 require a 10% down payment.
Which FICO score do mortgage lenders use?
Most lenders determine a borrower’s creditworthiness based on their FICO score, a credit scoring model and risk analysis system developed by Fair, Isaac, and Company in 1956. FICO scores have different names at each of the three major United States credit report companies: Experian, Equifax, and TransUnion. These three are most commonly referred to when a mortgage lender is determining whether to provide you with a loan.
How quickly can I raise my credit score?
Credit scores are the results of many variables (payment history, credit utilization ratio, length of credit history, credit mixture), some of which are calculated quickly, and others that can require weeks or months to accurately compute. Unfortunately, that means there is no accurate way to fully predict how long it will take to earn a better credit score. However, you can begin by focusing on accruing a history of consistent payments, which is the most influential factor in a credit score.
What credit score does a first-time home buyer need?
A first-time home buyer will need a credit score of at least 500 to buy a home with an FHA loan. However, the FHA will require a larger down payment of 10%. If you have a credit score of at least 580, you may qualify for an FHA loan with a 3.5% down payment requirement.
What disqualifies you as a first-time home buyer?
In order to qualify for first-time homebuyer programs, you cannot have any record of property ownership or co-ownership in the last three years. Beyond that, you’ll need to meet the minimum mortgage requirements set by your lender. That’s because the lender wants to make sure you can keep up with the mortgage payments. For example, if you have too much credit card debt that leads to a high debt-to-income ratio, a lender may not approve your mortgage application.
What is the lowest credit score FHA will accept?
You may be able to obtain an FHA loan with a credit score as low as 500 but that low credit score comes with an increased down payment requirement. If you have a credit score of at least 580, you may be able to obtain a low with 3.5% down.
Can I get a first-time home loan with a 650 credit score?
Many lenders are willing to work with first-time home buyers who have a credit score of at least 650. Although you can likely get a loan, you might not get the best interest rate with a 650 credit score.
What credit score is needed to buy a house with 5% down?
You’ll need a credit score of at least 580 to use an FHA mortgage to obtain a home with 5% down. However, a credit score between 500 to 579 will require a down payment of 10% for an FHA loan.
Is 700 a good credit score to buy a house?
A credit score of 700 or higher is a good credit score. In most cases, that is more than sufficient to buy a house. However, your income and debt obligations must also meet the lender’s standards.
What is the normal credit score to buy a house?
A conventional mortgage requires a credit score of at least 620 to buy a house. Since many buyers choose a conventional loan, a 620 credit score might be considered normal.
However, you can have a credit score below 620 and still buy a house. With the help of an FHA loan, you can have a credit score as low as 500. The government-backed loan program opens the door for more borrowers to achieve their goal of homeownership.
Typically, a credit score below 500 is considered bad. With bad credit, it can be difficult to close on a loan.
What is the best credit score to purchase a house?
Generally, a credit score of 700 or higher offers a borrower the best financing options. With a higher credit score, you can access lower mortgage rates. Depending on the details of your mortgage, a lower interest rate could lead to thousands of dollars in savings.
But it’s not necessary to wait until you have a great credit score. You can obtain a home loan through the FHA with a credit score as low as 500. If you dramatically improve your credit score in the future, refinancing is always an option.
Are there alternative types of mortgages for low-credit score borrowers?
The VA loan program, which is guaranteed by the U.S. Department of Veterans Affairs, offers zero down payment loans, competitive mortgage interest rates, and no private mortgage insurance (PMI) with relatively flexible credit requirements, which can be a good option for borrowers who are active-duty service members or veterans. For borrowers who live in rural areas, the USDA loan program, guaranteed by the U.S. Department of Agriculture, can be a good option, as long as your gross monthly income falls below the median for the area.