Do you qualify for an FHA loan based on your credit score and credit history? And even if you do, is an FHA loan the right choice for you?
If your credit score is under 620, you may not qualify for a conventional mortgage, but a Federal Housing Administration (FHA) loan could be the answer you’re looking for.
After conventional mortgages, FHA loans are the most popular way to finance a new home purchase. Census data shows that almost 20% of all new home purchases were made with an FHA mortgage loan.[1]
FHA loans are offered through traditional mortgage lenders – like banks, credit unions and online lenders – but they are backed by the U.S. government through the FHA.
What’s the Minimum Credit Score Required for an FHA Loan?
Your credit score is a three-digit number ranging from 350 – 850. The higher your credit score, the more creditworthy a lender will consider you to be.
To qualify for an FHA loan, the credit score requirements are:
- Minimum 580 with a 3.5% down payment
- Minimum 500 with a 10% down payment
When you compare the minimum FHA credit scores with the minimum credit score for a conventional loan – which is 620 – it’s easy to see why an FHA loan might be attractive to many borrowers.
What Debt-to-Income (DTI) Ratio Do You Need to Qualify?
Besides your credit score, your debt-to-income (DTI) ratio is the next most important number that lenders will consider when deciding if you qualify for a loan. This applies to FHA loans as well as conventional loans.
To figure out your DTI, you add up all your fixed monthly payments (think: rent, a mortgage, credit card minimums, student loans, personal loans and auto loans) and divide it by your gross monthly income.
While lenders will always prefer a lower DTI, you can qualify for an FHA loan with a DTI as high as 43%, depending on your credit score. Be sure to check with your lender to understand their specific qualifications.
Can You Get an FHA Loan With a Bankruptcy?
If you’ve been through a Chapter 7 or Chapter 13 bankruptcy, your credit score will take a hit, but you can apply for an FHA loan within 2 years of getting your bankruptcy discharged or dismissed.
If you apply for a conventional loan after bankruptcy, your lender may make you wait 4 – 6 years after your bankruptcy is discharged or dismissed before they will consider your application.
Can You Get an FHA Loan With No Credit Score?
Believe it or not, not everyone has a credit score. From young adults to immigrants who are new to the country, there are lots of people who haven’t had the time or opportunity to develop a credit history.
Fortunately, the FHA prohibits lenders from rejecting applications based on the credit score alone.[2] This makes FHA loans an attractive option, especially for first-time home buyers.
To qualify for an FHA loan with no credit score or credit history, you’ll need to provide at least a year’s worth of proof that you’ve been able to pay your bills on time.
Non-traditional forms of credit – like utility and cellphone bills, rental payments and car insurance payments – can help demonstrate your payment history.
What Non-Credit Score Considerations Will Lenders Consider?
Your credit score is only one piece of the qualification puzzle. There are other factors that determine whether you can get an FHA loan.
Down payment
A down payment (traditionally 20% of the home purchase price) can be a challenging hurdle to homeownership. An FHA loan can lower the bar to entry for prospective home buyers because the down payment requirement is 3.5%.
That said, if your credit score is below 580, a larger down payment can help your chances of getting approved.
Income history
For FHA loans, you’ll also need to provide proof of stable employment history. If your credit score is low because of extended periods of unemployment, your lender may ask for additional documentation.
If you have an FHA loan, you can refinance quickly with an FHA Streamline Refinance. You may be able to skip the appraisal and eliminate your mortgage insurance premium (MIP).
Can I Work With Any Lender?
To get an FHA loan, you have to work with an FHA mortgage lender. Fortunately, they aren’t hard to find.
If your current lender doesn’t offer FHA loans, consider working with credit unions and other lenders who specialize in FHA loans. Or you can use this free tool to find an FHA-approved lender.
When Your Credit Is an Issue, FHA Loans Can Help
Does any of the following ring any bells?
- Your credit score is between 500 – 619
- Your DTI is above 50%
- Conventional lenders are turning you down or offering loans with higher interest rates
- You need more money for a down payment
- You want to get down payment assistance outside your circle of family and friends
- You’ve gone through bankruptcy and want to become a homeowner as soon as possible
If you found yourself answering yes to any of these, an FHA loan may be the right solution for you.