Your Guide To Understanding the FHA Credit Score Requirements

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Are you looking to secure a mortgage for your first home but your credit score is letting you down?

You’ve probably considered a couple of loan options in the lenders’ market, but the Federal Housing Administration (FHA) loan looks the most attractive.

But what exactly is an FHA loan and what does it take to qualify?

For starters, these loans are made by private lenders and insured by the FHA. The agency is managed by the Department of Housing and Urban Development.

As such, the federal government (through the HUD) sets the eligibility requirements, including credit score requirements.

If you’re struggling to get a hang of FHA credit score requirements, we’re here to shed more light. Keep reading!

Credit Score Basics

Your credit score is built on your credit history. Do you pay your bills on time? Have you defaulted on any loans before? Do you have any dormant bank accounts? Have you recently searched for credit?

Credit reporting agencies use this information to award you a score, which typically ranges from 300 to 850. Banks and other financial lenders generally consider a score of 300–579 very poor, 580–669 fair, 670–739 good, 740–799 very good, and 800–850 excellent.

The vast majority of people fall between 600 and 750.

FHA Credit Score Requirements

FHA loans are designed for people without impressive credit scores.

As of 2017, the minimum credit score for an FHA-insured home loan is 500. If you show up with a score of 499, expect lenders to reject your application.

However, if your score ranges from 500 to 579, you will need to put down 10 percent of the total value of the loan. This means if you’re seeking $200,000, you will need a down payment of $20,000.

Applicants with a score of 580 or higher only need to put down 3.5 percent of the total value of the loan.

Using the example above, a prospective homeowner will need to put down $7,000.

Evidently, a lower credit score won’t necessarily mean you’re not eligible for an FHA, but you will dig deeper into your pockets for the down payment.

How Lenders Pull Applicants’ Credit Scores

There are three national credit reporting bureaus; Equifax, Experian, and Transunion. It’s not uncommon for these bureaus to report varying credit scores for the same person.

So, which score should your lender use?

To ensure fairness, HUD developed a set of guidelines for lenders making FHA loans.

  • If the lender only pulls your score from one bureau, the score becomes the minimum decision credit score (MDSC)

Before applying for a mortgage (at least 6 months prior to), it helps to scrutinize your credit report for errors.

A simple mistake can lower your credit score. If you find a mistake, dispute it.

Beyond the FHA Credit Score Requirements

Remember, FHA loans are only backed by the government. The money comes from private lenders.

As such, beyond HUD guidelines, private lenders may impose their own loan eligibility requirements. It’s your job to research various lenders and find one with the most favorable eligibility requirements.

Got any questions regarding FHA credit score requirements? Ask away in the comments section below!

Or, get started on your path to homeownership with our online assessment of what loan should work for you.

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