FHA Loan Credit Score Requirements

An FHA loan is a type of mortgage that is insured by the FHA (Federal Housing Administration). These loans are typically given to first-time homebuyers, individuals with lower incomes, or those with special needs that are in need of financial assistance. It should be noted that the loan is not actually granted by the FHA, but is fulfilled by an independent lender, with the FHA offering to make loan repayments in the event that the borrower is unable to do so (hence the commonly used term “FHA-insured loans”). The FHA has been helping first-time homebuyers and low income families purchase homes since 1932, and in addition to providing mortgage loans also provides financing for home repairs and renovations. It is also possible for senior citizens to receive home financing assistance from the FHA, provided they meet a certain set of criteria. Even when the housing market is in poor condition and foreclosures are prevalent the FHA still insures mortgages. However, while individuals with low incomes are eligible for FHA loans, they must meet certain FHA loan credit score requirements, which are discussed in detail below.

FHA Loan Credit Score Requirements
During October of 2010 HUD (the Department of Housing and Urban Development) issued new FHA loan credit score requirements. Under these new requirements borrowers must have a credit score of at least 500 to be eligible for any type of FHA-insured mortgage financing. Borrowers that have a credit score at or above 580 are able to receive maximum financing, while borrowers with a credit score between 500-579 are only eligible to receive 90% LTV (loan to value ratio). The loan to value ratio is the amount of the property purchase price that is covered by mortgage financing. In other words, someone with a credit score between 500 and 579 can still receive an FHA mortgage loan, but will usually need to provide at least 10% of the property price as a down payment. Individuals with a credit score higher than 620 are typically automatically approved, while those with lower credit credit scores may need to provide additional documentation in a manual underwriting.

Improving Credit to Meet FHA Loan Credit Score Requirements
Individuals that have been denied assistance due to FHA loan credit score requirements may want to rebuild their credit for at least six months to a year, or as long as it takes to raise the credit score to acceptable levels, before reapplying. The fastest way to rebuild credit is to repay your monthly balance in full each month, avoid late payments, and utilize no more than 30% of your overall available credit line. If you currently have outstanding credit card debt, you may want to utilize debt consolidation and/or debt counseling services to simplify the process of rebuilding credit.

Eligibility Criteria Other Than FHA Loan Credit Score Requirements
Aside from meeting the aforementioned FHA loan credit score requirements, your chances of approval may also be improved by having at least two years of uninterrupted employment, preferably with a single employer. Ideally, your income should have been steady or increasing during the last two years. It is also best to have no bankruptcies within the past two years, and no foreclosures in the past three years. To maximize your chances of FHA-insured loan approval you should apply for a mortgage that carries a monthly payment of no more than 30% of your gross income (your income before taxes are deducted). Finally, your chances of approval will be higher if you have no more than two late payments (that were at least 30 days late) during the past two years.