What Credit Score Is Needed For An FHA Loan
What Credit Score Is Needed For An FHA Loan
This BLOG On What Credit Score Is Needed For An FHA Loan Was UPDATED On January 4th, 2019
So, you want to buy your own house but have credit issues? Having a not-so-good credit can be a really big problem when you are looking for mortgage loans. Most of the lending institutions do not lend money to the people who have a low credit score for the obvious reason that they will not be able to pay back the money lent to them.
If you are also one of those people who are unable to get mortgage loan to buy your house because of a low credit score, there is a great option for you in terms of the FHA loan. What makes FHA loans so popular among people looking for mortgage loans is the fact that these loans are also available to the people with a poor credit.
Before we go on and tell you the credit score you need to secure an FHA loan, let us talk all about the FHA loan in detail to find out why is it the most preferred form of mortgage loan in the U.S.
FHA Loan – What is it?
Buying a house on your own is not a simple thing. Hardly anyone is able to pay so much cash upfront to buy a house. Thus, they move to loans from lending authorities that help them make the payment for the house and the amount is then returned to the lender with interest in a specified period of time.
The Federal Housing Administration was created by the government in 1934 to help encourage the ownership of homes in the U.S. Getting a mortgage loan requires a high down payment, a good credit score as well as an employment you’ve had for years. Not everyone has all of this when they go to apply for a mortgage loan. Most of these applications are denied because of the lack of a good credit score.
Since its inception, more than 40 million families in the U.S. have been able to buy or refinance their properties. The popularity of the FHA loan is directly linked to their flexibility. The FHA loan program was built to promote the ownership of homes among Americans who otherwise would not be able to qualify, and it is still standing true to its initial beliefs.
A great alternative to private lending institutions is FHA. The FHA doesn’t offer mortgage loans directly. However, you can get an FHA approved loan from a private lender. The mortgage is insured by the FHA which helps the lender gain confidence that the money will be paid even if the borrower defaults. Thus, an FHA approved loan is one of the most popular and convenient forms of mortgage loans to get in the U.S.
Benefits of FHA Loans
- 3.5% down payment
- Low credit score requirements
- Down payment can be a gift
- Low interest rates
- Adjustable and fixed rate mortgage options
- High debt to income ratio also accepted
- Easy to qualify for
Drawbacks of FHA Loans
- Low loan limits
- High MIP fees\that are permanent until you refinance out of loan
- Mortgage insurance required
FHA Credit Score Requirements
Having a good credit score is the first step to getting your mortgage loan approved. What if you don’t have a good credit score?
To be able to qualify for the Federal Housing Administration approved loan, you need to have a credit score of at least 500. The minimum requirement to apply for FHA loan with a down payment of 3.5% is 580 credit score. Most of the other lenders, however, require a credit score of at least 620-640 to apply for mortgage loans.
Thanks to FHA loans, thousands of people with low or average credit scores have been able to buy their own homes. While conventional loans such as the ones offered by the giants Freddie Mac and Fannie Mae still have their place in the market, but they are not very flexible when it comes to the loan granting criteria. The gap left by these firms is filled by the FHA that offers mortgage approvals to people with
- Lower income
- Medium to low credit
- Income coming from more than one sources
- Co-borrowers who have no plans of living in the home
- Properties that need repairs
- Down payment in terms of gift money
If it was not for FHA, millions of now homeowners would have spent years of their lives renting properties. While there is still a room for the FHA to expand its capacity for the aspiring homeowners, it is still doing a great job for the people who wouldn’t have any other source to get mortgage loans.
Why Are FHA Loans So Popular?
FHA loans are the most popular forms of home buying loans. They are particularly popular among first-time homebuyers because of the minimum credit score requirements as compared to other lending institutions. Other conventional loans, as mentioned before, require a high credit score requirement that make most of the people unable to qualify for these loans.
FHA Down Payment
Another thing that makes FHA loans really popular is the low down payment requirement it has as compared with conventional loans. You will just need to make 3.5% down payment if you have a credit score of 580 or more. Another benefit of FHA loans is the fact that the down payment can also be a gift from a family member or a friend. In fact, the FHA also allows even the entire amount of the down payment to be a gift.
Mortgage Insurance Premium (MIP)
The FHA needs funds to be able to insure all the mortgage loans it offers. The funds come from a mortgage insurance premium, MIP. There are two kinds of MIPs offered by the FHA: an annual MIP fee and an upfront MIP.
Upfront MIP Fee: The upfront MIP Fee is 1.75% of the entire loan amount.
Annual MIP Fee: The annual MIP fee depends on various factors including but not limited to amount of loan and the loan-to-vale. The fee is usually 0.85% of the loan amount and is typically charged monthly. The new MIP rules however, require the MIP to be charged for the entire period of the loan.
The Loan Limit
The loan limit from the FHA was recently increased keeping in mind the ease of the borrowers. Here are the new limits:
Low cost areas of the county: $271,050 to $345,000
High cost areas of the county: $625,000 to $636,150
For the people who are looking for loans exceeding this amount, they will then have to move to the conventional loans to meet the loan requirements.
Applying for FHA Loans
Wondering how to apply for FHA loans?
The first step to applying for a loan with FHA is completing a loan application with a lender that has been approved by the FHA. A number of private lending institutions have been authorized to offer mortgage loans through the FHA.
As is the case with other types of loans, it is best to get a rate quote from at least 3 to 4 different lenders before you decide on any one. There are different kinds closing fees and other costs in FHA mortgage loans as well just like other kinds of mortgage loans. These costs and fees will differ from one lender to the other. thus, it is important to get quotes from different lenders to ensure you are getting a good deal.
I Have a Low Credit Score. Can I Apply for FHA Loans?
When a new policy rolls out from the FHA, lenders are not very quick to adapt to it, they usually want to wait for the other lenders to implement to the rules and see the results before they implement it themselves. Usually, there is a step-down effect in this case. It starts from one lender loosening the guidelines and is then followed by the others. Lenders loosen themselves a bit more when they see the new standards working.
If you are a low credit home shopper, you should make sure you get quotes from different lenders before deciding on any one. You might encounter someone who is an early adopter of the new policies or might find someone who is waiting for the results from other lenders. Thus, walk around in the lending market to ensure you get the best deal.
There is a reason to believe that sooner or later, lenders will adopt the new policies rolled out by the FHA. It is just a matter of time when they do that. Thus, the millions of renters who are unable to get their own homes because of an imperfect credit history will finally be able to qualify one day or the other for these mortgage loans.
Improve Your Credit Score Before Applying for FHA Loans
The biggest factor that impacts whether or not your loan application will be approved and what will be the mortgage rates is your FICO score. FHA mortgage loans are one of the very few types of mortgage loans that you can apply for even if you have a bad credit. While the minimum credit score requirement for FHA mortgage loans is 500, you will have to pay higher rates for a bad credit score. Thus, it is advised that you try to maximize your credit score as much as you can before applying for these loans.
Here are some tips that can help you improve your credit rating before you go on and apply for a mortgage loan.
Pay Your Credit Card Balance
Credit utilization has a great impact on your overall credit rating. Credit utilization is the ratio of your credit card balance as compared to the credit limit you have. For example, if your credit card limit is $10,000 and you have utilized $5,000, your credit utilization ratio will be 50%. You will be surprised to know that as much as 30% of your overall credit score is impacted by your credit utilization ratio. Thus, if you have a high credit card balance, you credit score is going to suffer a lot. It is important to keep your card balances below 15% of their utilization limit to ensure your credit score is improved.
Don’t Apply for Any New Loans or Credits
When you apply for a new loan or credit lines, a credit check will be performed on you by your lender. This will put a label of hard inquiry on your credit history which will impact your credit score. Hard inquires and new accounts make for 10% of your overall credit score. Thus, it is important not to apply for any other loan while you have applied for an FHA mortgage loan.
The Final Word On What Credit Score Is Needed For An FHA Loan
The minimum credit score requirement for an FHA loan is 500 with a down payment of 10%. For a down payment of 3.5%, you need to have a credit score of 580. The FHA also allows for 100% of the down payment to be made in the form of a gift from a family member or a friend. This makes it one of the most feasible loan options for the people who want to buy a house but have a low credit score. However, it is still advised that you try to maximize your FICO scores as much as you can before you go on and apply for an FHA approved loan. Furthermore, when you have applied for an FHA loan and are waiting for the approval, do not apply for any other loan as it will have an impact on your credit history and will also impact the approval of your mortgage loan from the FHA. Gustan Cho Associates at Loan Cabin Inc. has no overlays on government and conventional loans.
This BLOG On What Credit Score Is Needed For An FHA Loan Was UPDATED On January 4th, 2019 by Gustan Cho, National Managing Director of Gustan Cho Associates at Loan Cabin Inc. NMLS 1657322