Following the financial crisis of 2008, there was a rise in interest in mortgages backed by the Federal Housing Administration (FHA). One of the main reasons for this interest was because it can be easier to qualify for an FHA mortgage loan. The credit requirements are less stringent than those for conventional loans, and you can get a loan with as little as 3.5% down.
How an FHA Mortgage Loan Works
For the most part, an FHA mortgage loan is straightforward. You apply for a mortgage with a lender that is approved by the FHA loan program. You don’t get a loan from the government. Instead, the FHA insures the loan. That way, the lender is more likely to approve you for a loan, even if you wouldn’t normally be considered a “good” risk.
One of the main ways that your eligibility for a home loan is determined is through your credit score. The higher your credit score, the more likely you are to qualify for a mortgage — and to get the best possible rate. An FHA mortgage loan can help you get a home, even if you wouldn’t normally be considered a candidate.
Credit Score Required for an FHA Mortgage Loan
Most of us need to borrow for a home loan. The capital required to purchase a home is beyond reach for most of us. A lender helps bridge that gap. However, it’s important to remember that it’s the lender on the hook. They provide you the money up front, and in return, you make regular payments, plus interest, over a set period. A lender expects to earn a return on the money provided to you. A credit score is one way for lenders to get an idea of how likely you are to repay the loan as agreed.
When you apply for a conventional loan, there is a good chance that you will need at least a 620 credit score (the minimum for a home loan is 500, but few lenders are willing to take a risk on someone with that low of a credit rating). However, even with that minimum in place, many conventional mortgage lenders prefer to see a score of at least 680 to consider you a reasonable risk, and you might need at least a credit score of 740 to qualify for the best mortgage rates.
The FHA doesn’t technically have a minimum credit score requirement. The required credit score is left up to individual lenders to decide. In 2015, many FHA lenders required applicants to have a 640 credit score in order receive approval. This year, in 2016, many lenders have relaxed their requirements. Now, FHA mortgages are often approved with scores of 580. This makes it a little easier to qualify, even without pristine credit.
Another credit bonus associated with FHA loans is the fact that it’s possible to be cleared to buy a home 12 months after a foreclosure, bankruptcy, or short sale. Many lenders won’t allow a conventional loan until at least two or three years have passed since a major credit event. If you can get your credit score back up to 580 within a year of a major financial or home ownership problem, there is a better chance of being approved for an FHA mortgage loan than many other types of loans.
Down Payment Requirement
Even though low down payment loans and no down payment loans are making a comeback in the conventional world, it doesn’t mean that it’s always easy to get those loans because of the credit requirement. FHA loans come with a relatively low down payment, as low as 3.5%, so for someone who is looking for a 0% down payment an FHA mortgage loan might not be of interest — unless the credit requirement can’t be met.
For the most part, FHA loans are popular because the requirements are easier to meet. Because the government insures them, lenders feel a little more comfortable giving money to someone with a higher risk profile. If you have a 580 credit score, and enough to make the 3.5% down payment, you might be able to get a home loan, even if you can’t get a conventional loan.