FHA Credit Score Guidelines
Although the Federal Housing Administration (FHA) only requires a 580 FICO score to qualify for the 3.5% minimum down payment requirement, borrowers are hard pressed to find a direct lender or an approved FHA Lender to extend a mortgage loan with such a low FICO score.
FHA Down Payment
There are two minimum credit scores requirements for an FHA loan, depending on the down payment level.
- To qualify for the minimum down payment requirement of 3.5%, a borrower must have a minimum middle-FICO score of 580.
- Borrowers with a FICO score of less than 580 and all the way down to 500 may still qualify for an FHA-insured loan but they will need a minimum of 10% down payment.
Most commercial lenders and big banks use 640 middle FICO score as the credit score criteria to qualify a home buyer. Logic is simple, the higher the credit rating, the less the likelihood of defaulting on their mortgage loan. FHA 203k Loan Lenders will extend an FHA mortgage to borrowers with scores as low as 580 with compensating factors.
As long as the borrower gets approval from either Fannie Mae or Freddie Mac’s automated underwriting system (AUS), and they meet all the criteria and requirements, they can get an FHA loan. After all, we are the FHA 203k Loan Lenders, the best FHA lender.
Non-medical collections and charged-off accounts do not have to be paid either. While most lenders require these items to be paid, our investors at FHA 203k Loan Lenders will not require previous collection accounts to be paid off prior to closing on your loan.
Minimum credit score for FHA loan
As mentioned above, there are two minimum credit score requirements for an FHA: (a) 580 with 3.5 percent down and (b) 500 with 10 percent down. However, an FHA loan is not a sub-prime loan program. Although the FHA allows borrowers with a lower FICO to qualify for a home loan, it does not allow approvals to borrowers who have low scores due to their inability to manage and pay their creditors on time. There are several reasons why a borrower’s credit score is low without actually having a “bad credit”.
– Credit utilization is the ratio of your credit card balances in relation to your credit limits. It is the measurement of the amount of the credit limit that is being used.
Recently Opened Accounts
- – Recently opened accounts, especially too many recently opened accounts, can hurt your overall credit score. Since the accounts were just opened recently, the history of those new accounts is not long enough to provide sufficient payment history to demonstrate responsible behavior. Furthermore, having multiple open accounts that are relatively new is seen as a higher risk due to the possibility of becoming overextended, resulting in loan default.
Limited Credit History
- – Limited credit history means that your credit file either has a few accounts listed, less than 5 accounts with no major account or the open accounts have only been opened for a short period of time, typically within 12 – 24 months history. In short, it means your credit profile is new. It is not a bad thing, it just means they are all recently opened, having not enough history, therefore will not get a high credit rating.
Previous Derogatory Accounts
- – Derogatory account means that account is considered negative. Typically, a negative account indicates serious delinquency or late payments. If you have a derogatory item in your credit report, it can have a significant negative impact your credit score.
For more information regarding credit score requirements, contact us!