For borrowers who can't qualify for a conventional mortgage or whose credit scores prevent them from getting a competitive annual percentage rate (APR) on a mortgage loan, a mortgage guaranteed by the Federal Housing Administration -- also known as an FHA loan -- can be an excellent way to open the door to homeownership at a reasonable cost.
There are two major advantages to FHA loans versus other common types of mortgages. First, the borrower doesn't need a large down payment, since 3.5% of the purchase price is all that's required -- even with borderline credit qualifications. Plus, the down payment funds can come from a gift or assistance program, and most other costs associated with obtaining an FHA mortgage can be rolled into the loan, minimizing out-of-pocket costs to the buyer.
The second big advantage is the flexible FHA loan credit score requirements. Here's a quick guide to the current credit score requirements for obtaining an FHA loan, as well as some other things to consider before deciding if it's the right type of mortgage for you.
FHA loan credit score requirements
When it comes to the FHA loan credit score requirements, there are two different minimum FICO score requirements, depending on how much money the borrower is prepared to put toward their down payment, explained here:
- 3.5% down payment: Borrowers who want to take advantage of the FHA loan's minimum down payment option need a FICO credit score of at least 580 to qualify.
- 10% down payment: Borrowers who can put at least 10% down on their home purchase can qualify for an FHA mortgage with a FICO credit score as low as 500.
Both minimums are significantly below what most lenders would consider good or even fair credit. So it's fair to say FHA mortgage loans are available to borrowers with significant adverse information on their credit reports. This is especially true for borrowers with 10% down payments, as a FICO score of 500 is deep into the realm of bad credit.
However, just because a borrower's score meets the minimum requirement doesn't necessarily mean they'll qualify. For one thing, credit qualifications are just one part of the mortgage approval process. And while the score requirements are flexible, certain specific information on your credit history might be unacceptable, such as unpaid collection accounts or unresolved judgements.
When a mortgage lender checks your credit score, they typically pull your FICO scores from all three major credit bureaus -- Equifax (NYSE: EFX), Experian (LSE: EXPN), and TransUnion (NYSE: TRU) -- and use the middle number. So if your FICO scores are 610, 615, and 640, for example, the lender will use 615 as the basis for your qualification.
Many credit cards give borrowers free FICO score access, but this usually only means one score. If you want to see all three, you'll probably have to pay for it. A few places sell credit score access, but myFICO.com is one good place to get all of your scores and is run by the same company that makes the FICO score in the first place.
Finally, some versions of the FICO scoring formula are specifically used by mortgage lenders. So if the FICO score your lender sees doesn't match up with what you see when you check your score or your lender tells you you have a lower credit score than your credit card company says, that's probably why.
Looking at my own scores on myFICO.com, my main FICO score from Equifax currently is 785. However, the Equifax version most commonly used by mortgage lenders is 751. (Note: A myFICO membership can get you access to all your FICO score versions.)
FHA credit score requirements vs. conventional mortgage credit standards
A conventional mortgage requires a minimum credit score of 620. That's the short answer. However, this assumes the borrower has at least two months of mortgage payments in reserves, puts at least 25% down, and has a debt-to-income (DTI) ratio of 36% or less.
According to Fannie Mae's current underwriting standards, a borrower who wants to put just 5% down, doesn't have much cash in reserves, and has a 36% DTI must have a 680 credit score. And depending on the borrower's specific down payment, reserves, and DTI, minimum score requirements for a conventional mortgage range from 620-720.
Some specialized mortgage types, such as a VA loan or USDA loan, have credit standards somewhat more flexible than a conventional mortgage. But not every borrower can obtain them.