Credit Score Loan Requirements

by Jane L.Feb. 25, 20173
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Credit Score Requirements for an FHA Loan

If you're looking for a new home, your biggest financial concern is securing a mortgage loan. To do that, most lenders require a substantial down payment (20 percent is the standard rule of thumb) and at least a "good" credit score (usually in the 650 and up range). If you're missing one or both of these things, you might consider an FHA loan, which has more lenient requirements because it's backed by the Federal Housing Administration. If you think an FHA loan is the best option for you, here's what you need to know about the credit score requirements.

Risk-Based Pricing

Most conventional lenders use a risk-based pricing approach for loans. If they determine that a borrower has a high risk of being unable to pay back the loan, they charge a higher interest rate or other terms to offset their own financial risk. FHA loans don't use risk-based pricing today (though they have in the past for a short time frame). If you secure an FHA loan, your terms shouldn't be affected by your credit score or down payment, though your overall approval is contingent on meeting certain credit requirements.

Minimum Credit Score and Down Payment Requirements

The Department of Housing and Urban Development (HUD) is in charge of the FHA loan program, and they set the credit requirements for FHA loans. The official guidelines from HUD also specify the following:

  • If your lender pulls scores from all three of the major credit reporting agencies (Experian, Equifax and TransUnion), the middle number is used to determine your eligibility.
  • If your lender pulls only two scores, then the lower of the two is used.
  • If your lender pulls only one score, it alone is used to determine your eligibility.
  • An FHA loan requires at least a 500 credit score. If yours is lower, you'll need to bring it up before you will qualify.

    Borrowers with a score between 500 and 579 may be eligible for an FHA loan, but they'll need a down payment of at least 10 percent of the total loan amount.

    Borrowers with a score of 580 qualify for the lowest down payment option, which is only 3.5 percent.

    Credit Score Overlays

    Though the FHA program technically only requires a credit score of at least 500, individual lenders may have their own requirements. Borrowers aren't actually securing a loan with the Federal Housing Administration. An FHA loan is secured with a traditional lender, but it's backed by the FHA as an additional layer of risk protection for the lender. Lenders often set their own credit requirements on top of the FHA program's requirements (hence the term "overlay"), and these will vary from one lender to the next. An industry average seems to be a minimum score of 600 to 620, but your lender may have a number that's higher or lower. To secure a loan with the lender you choose, you'll need to meet both the requirements of the FHA as well as those of the lender.

    Will You Qualify?

    While these minimum requirements are a great starting point for informational purposes, there's no guarantee that you will or won't be approved for a loan based on what's listed here. If you want a certain answer about an approval, contact an FHA lender and apply. They'll use your credit score and other risk factors to determine your eligibility. If you aren't approved by one lender, you can always apply with another. Because each lender has their own requirements, it's possible to be turned down for a loan with one lender, only to be approved by another.

    If you can't secure a loan because of credit, take a little time to improve your score before you try again.

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