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FHA Credit Requirements are Low

FHA Credit Requirements are Low
Betsalel Cohen
UpdatedMar 9, 2019
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    4 min read
Key Takeaways:
  • FHA purchase mortgages have low credit requirement.
  • The program allows for a 500 FICO score with a 10% or more down payment.
  • If you have a small down payment, then the FHA purchase mortgage requires a 580 FICO score, which is also very low.

Check out the FHA’s Credit Requirements

Are you looking to purchase a home, but worried about your credit score? If you have a low credit score, then you are probably wondering what the credit score requirements for an FHA loan are.

Your credit history and credit score are important factors that lenders consider when approving your loan application. Did you know that FHA loans have lower credit score requirements than conventional loans? Combined with FHA loans very low down payment requirements, FHA purchase mortgages are a popular mortgage.

Remember, when shopping for a mortgage, lenders often have stricter requirements. They will consider not only your credit score, but also your overall credit history, the stability of your income, your total debt and monthly debt payments, and the amount of your down payment.

FHA Credit Score Requirements

The FHA credit score requirements are extremely low. For example, an FHA purchase mortgage with a 10% or more down payment only requires a 500 FICO score. If you wish to make a smaller down payment, between 3.5% - 10%, then the FHA program requires a FICO score of 580.

This requirement is considerably lower than for a conventional loan, which requires a FICO score of 620.

FHA vs. Conventional Loans - Actual Credit Scores

According to the January 2019 Origination Insight Report, Ellie Mae, a leading mortgage software company that processes a large percentage of mortgages, credit scores on FHA loans were 70 points lower than Conventional mortgages. The average FICO scores remain relatively stable during 2018.

Don’t be scared. Those are just averages. According to the Ellie Mae report, 25% of the FHA closed loans in January 2018 had a FICO score between 600-649 compared to only 4% of conventional loans. Also, 5% of FHA loans had FICO scores between 500-600.

FHA Credit Requirements: Not Just Credit Score

The FHA allows a wide range of credit report and credit history requirements including both traditional and non-traditional credit history.

According to the FHA Handbook, published by the United States Department of Housing and Urban Development (HUD), FHA lenders are required to check each borrowers credit score. Also, they need to analyze the Borrower’s credit history, liabilities, and debts to determine creditworthiness.

To check the credit score and credit history, lenders “must either obtain a Tri-Merged Credit Report (TRMCR) or a Residential Mortgage Credit Report (RMCR) from an independent consumer reporting agency.” If there is a credit score available, then the lender is required to use that to process the application. If there is a score from all three Credit Reporting Agencies, then they take the middle score. If there is less than three, then lenders use the lowest score. Lenders use the lowest score of all the borrowers.

Here are a few of their additional requirements for Lenders using an automated credit underwriting system:

  • The lender may obtain a joint report for individuals with joint accounts.
  • The lender is required to obtain a credit report for a non-borrowing spouse who resides in a community property state, or if the subject Property is located in a community property state.
  • “Credit reports must contain all information from at least two credit repositories pertaining to credit, residence history, and public records information
  • FHA lenders need to take into consideration negative items such as delinquent debt, judgments, and bankruptcy.

What happens if you don’t have a traditional credit report? FHA loans allow lenders to underwrite loans and carefully check your credit history manually. According to the FHA Handbook, For Borrowers without a credit score, the lender “must either obtain a Non-Traditional Mortgage Credit Report (NTMCR) from a credit reporting company or independently develop the Borrower’s credit history using the requirements outlined below.”

Here are some examples of non-traditional tradelines, which must be independently verified by the lender: “rental housing payments (subject to independent verification if the Borrower is a renter); telephone service; or utility company reference. The lender can use other sources sources of unreported recurring debt, including: insurance premiums not payroll deducted (for example, medical, auto, life, renter’s insurance);payment to child care providers made to businesses that provide such services;school tuition; retail store credit cards (for example, from department, furniture, appliance stores, or specialty stores); rent-to-own (for example, furniture, appliances); payment of that part of medical bills not covered by insurance;...”

FHA Credit Requirements - Part of a Bigger Picture

Can you qualify for an FHA mortgage? Do you have sufficient income, a low enough debt-to-income ration, or sufficient down payment?

FHA’s lower credit score requirements are one crucial hurdle to get approved for an FHA mortgage. Click here for more information about other FHA loan requirements.