FHA loans are extremely popular with home buyers today. There is the misconception that FHA loans are for low income individuals. That is far from the truth because there are many benefits of an FHA loan that reach far beyond the income level of the applicant. In some instances, FHA makes sense due to the flexible credit requirements.
The FHA credit requirements help many potential home buyers realize their dreams of owning a home. While conventional mortgages have very strict credit requirements, FHA loans allow for a much lower credit score.
What are the FHA Credit Requirements?
The FHA Guidelines on credit scores permit scores as low as 580 when the borrower plans to put just 3.5% down. Meanwhile, credit scores as low as 500 are permitted with a total down payment of 10%.
Although the FHA credit requirements will allow for scores as low as 500, many lenders have a self-imposed minimum that is much higher than that. Only the best FHA lenders in the industry will provide FHA insured loans for borrowers with a credit score as low as 500.
What are the other FHA Qualifications?
In addition to meeting the credit score requirements, borrowers must be able to provide the following:
· Down payment of 3.5% or 10% for credit scores below 580
· Two year continuous work history unless the borrower was attending school
· Two year’s tax returns and W2s
· Last month’s pay stubs
· Two month’s bank statements
· No bankruptcies within the past two years and no foreclosures within the past three years
These are the minimum requirements to secure an FHA mortgage approval.
What if I have Collections?
If you have collections that total more than $1,000, then your loan application will be reviewed more closely by an underwriter. If some or all of those are medical collections, they may not be considered to be derogatory.
What if I Have Late Payments on My Credit Report?
Late payments are always going to be a negative. However, you can still get approved for an FHA loan. That being said, late mortgage payments can possibly ruin your ability to get an FHA mortgage approval.
What if My Spouse has Good Credit but My Credit is Bad?
When there are two applicants on a mortgage, all lenders will use the lower credit score from the two applicants. Therefore, adding a co-borrower to the loan because your credit is low will not help with your approval. However, the co-borrowers additional income may help for qualification purposes.
FHA Credit Requirements Summary
The FHA guidelines are relaxed to the point where many US citizens are able to purchase a home with an FHA insured loan. If you are not sure whether you can meet the requirements, you should reach out to an FHA lender and have an initial discussion. They will look at your credit history and financial situation to help determine your maximum purchase price and/or whether you need to make some changes to put yourself in a better position to qualify.
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