While loans insured by the Federal Housing Administration (FHA) put much less emphasis on credit, the borrower’s credit score still matters. In addition to affecting lender’s interest rates, credit score can make the difference between qualifying for an FHA loan and not, depending on the circumstances.
When it comes to FHA credit requirements for FHA loans, the Federal Housing Administration sets a minimum standard for what they will insure, but most lenders add overlays to those minimum requirements, based on the risk tolerance of each lender. As such, although FHA loan guidelines state they will accept low credit scores, borrowers with credit scores below 640 may have some difficulty finding a lender who is willing to actually give them an FHA loan.
Looking at specific credit scores, most FHA lenders will require a minimum credit score of 640, though many will accept a credit score of 620. While scores in this range will not secure the best mortgage rates, the fact that the Federal Housing Administration insures these loans allows lenders to offer them to borrowers that may seem more of a risk. A small number of lenders will even offer loans to applicants with credit scores down to 580 provided that no late payments have occurred in the past twelve months.
When arranging loan terms for FHA, overall credit score is usually sufficient for lenders; likewise, the specifics are often insignificant to a lender. In general, lenders are not bothered by small charge-offs, small collections, or older late payments that appear on credit reports unless those payments occurred in connection with a previous mortgage. Nevertheless, try to ensure that your credit report lists as much positive activity as possible.
Lenders will not typically offer a loan to borrowers without a credit score. Exceptions can be made, and in some cases, lenders will agree to work with such applicants if financial responsibility can be proved by some other means.
For most applicants without established credit, presenting rent payments or utility payments, as well as phone or internet payments, can allow some applicants to establish what is known as non-traditional credit. With four non-traditional credit accounts, borrowers with no established credit can still acquire an FHA home mortgage loan, however, lender overlays for risk regarding applicants with extremely low credit scores or no score at all make this option hard to find.
The other question that is frequently asked is simply: can i get an FHA loan with bad credit? which was so commonly asked prompting us to dedicate its own article.
While it’s true that FHA loans generally allow for borrowers with lower credit scores, having good or excellent credit can save you thousands of dollars over the course of your loan; since interest rates are based on credit score, borrowers with a higher credit standing will receive offers for much lower interest rates than borrowers with poorer credit scores.
Read Lender411's comprehensive article on 7 FHA Mortgage Issues
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