Technically, FHA loans require a minimum credit score of 500. But many lenders require a higher credit score — especially if you want a 3.5% down payment.
FHA loans can help you reduce your down payment on a new home to 3.5%, but only if your credit score is at least 580.
If your credit score is as low as 500, you can still qualify for an FHA loan with a 10% down payment.
However, many lenders require credit scores higher than the minimum standards set by the Federal Housing Administration.
For many people looking to purchase a new home, saving for a traditional 20% down payment can be difficult, especially with home prices rising in many parts of the U.S.1 That’s why many homebuyers apply for a loan from the Federal Housing Administration (FHA). These government-backed mortgages are guaranteed by the FHA and allow qualified borrowers to make a down payment as low as 3.5%.
If you want to buy your dream home with a small down payment, your credit score will play a key role in determining whether you qualify for an FHA loan. But what is the minimum credit score required to qualify? Credit score aside, is an FHA loan right for you?
FHA loans are home mortgages backed by the U.S. government. The FHA itself does not make mortgages, but rather insures mortgages made by FHA-approved lenders, including banks and credit unions. The insurance protects these lenders if a borrower defaults on their mortgage.
FHA loans can be used to purchase or refinance a variety of residential properties, including single-family homes, multifamily homes, and condominiums. Some types of FHA loans can also be used to finance new construction or to cover the cost of renovating an existing home.
FHA loans are especially popular with first-time homebuyers who have limited savings.
Minimum credit score required for FHA loans
Historically, FHA loans have helped low- to moderate-income families achieve homeownership, so down payments are lower. They can also allow for more lenient credit scores than the 620 minimum FICO score that many conventional home loans typically require. For example, to qualify for an FHA loan with a 3.5% down payment, you’d need a minimum FICO credit score of 580. If you have a lower credit score (between 500 and 579), you may still qualify for an FHA loan, but you’ll have to make a higher 10% down payment.
One important caveat: Although these FICO scores are the minimum credit requirements set by the FHA, borrowers with credit scores between 500 and 580 may have a hard time getting an FHA loan . 2 That’s because many FHA-approved lenders still require a FICO score of at least 620 to qualify — and the FHA can’t force banks to meet the agency’s lower FICO score requirements. (The FHA relies on FICO scores, not VantageScores.)
Why you need to build a good credit rating
The FICO score on your credit report isn’t the only factor the FHA considers. The agency also looks at your payment history and any bankruptcies and foreclosures. However, the agency may consider special circumstances, such as job loss or injury, so you may still qualify for an FHA loan if you have one or two blemishes on your credit report.
Still, many mortgage experts recommend that anyone hoping to buy a home in the near future should work to build the best credit rating possible.3 The FHA requires that you have a recent good credit history, and many lenders want to see that a borrower has been reliably paying debts for at least a year.4 Additionally , in many cases, the higher your credit score, the lower your interest rate.
FHA does not lend directly, so you must apply through a private lender, such as a bank or credit union. In general, FHA loans involve the following requirements:
- Credit score: Although the FHA sets a minimum credit score of 500, many FHA-approved lenders require a higher minimum FICO score of at least 620.
- Down Payment: While you will need a down payment to get an FHA loan, this money does not have to come from your savings account. Donations are also acceptable as long as you can prove that you will not need to repay the donor for these funds.
- Debt-to-income ratio: Your debt-to-income ratio measures the amount you owe compared to your income. The FHA allows you to spend 31% of your income on housing costs and 43% of your total income on housing costs and other debts .
- Mortgage insurance premium: Lenders applying for FHA loans are required to pay a mortgage insurance premium, which is usually added to the total amount of the loan and paid monthly.
- Property requirements: The home must be the borrower’s primary residence. In 2022, FHA loan amounts cannot exceed $420,860 to $ 970,800 , depending on location. 6 Loan limits vary by state, with higher limits in more expensive parts of the country. The FHA also requires an appraisal to ensure the home is worth what the lender paid and that there are no safety issues.
- Personal and Financial Documents: Borrowers must have a valid Social Security number, have a stable income, provide employment-related documentation, and provide proof of U.S. citizenship, lawful permanent residency, or eligibility to work in the U.S. In addition to running a credit check, lenders will request recent bank statements.
A Brief History of FHA Loans
During the Great Depression, American homeowners defaulted on their mortgages, prompting the creation of the FHA in 1934 to fight foreclosures and help Americans own homes. As the world’s largest residential mortgage insurer, the FHA has insured tens of millions of properties in the United States since its inception . 7 In November 2021, the U.S. Department of Housing and Urban Development reported that the FHA had active insurance on more than 7.8 million mortgages . 8
Consider FHA loan alternatives
While FHA loans offer the advantage of lower down payments, homeowners may want to consider one potential drawback: the cost of mortgage insurance premiums. The upfront insurance premium is 1.75% of the loan amount and can be rolled into your monthly loan payments or included in your closing costs. You will also have to pay a monthly insurance premium—0.45% to 1.05%, depending on the terms of the loan—which will be added to your mortgage payments . 9 While a borrower who makes a 10% down payment will see those premiums due after 11 years, a homeowner who makes a 3.5% down payment will pay mortgage insurance premiums for the life of the loan.
Conventional mortgages, on the other hand, typically require borrowers to pay private mortgage insurance (PMI) premiums when their down payment is less than 20%. But this problem is temporary. Once you reach 20% equity in your home (either because you’ve paid off the loan balance or because home values in your area have increased), you can remove PMI from your mortgage. If you put 20% down from the beginning, you won’t have to pay PMI.
If a traditional mortgage isn’t right for you, it may be worth exploring other mortgage options, including those that require little or no down payment, and weighing the total costs. For example, the government offers different loan guarantees for specific groups of people. The Department of Veterans Affairs (VA) guarantees mortgages made to veterans and certain surviving spouses. These VA loans may require no down payment and no mortgage insurance. Similarly, the U.S. Department of Agriculture (USDA) offers home loans to low-income borrowers in certain rural areas that don’t require a down payment.
If you want to buy a home, a low down payment FHA loan is a good option. To get an FHA-secured loan, you need a credit score of at least 580 (3.5% down payment) and a minimum credit score of 500 (10% down payment). However, many FHA lenders require a credit score of at least 620.
- “House Prices and Inflation,” The White House
- “The Facts About FHA Requirements and FICO Scores,” FHA.com
- “There have never been more ways to build your credit score. Here’s what you need to know,” CNBC
- “FHA Loan Requirements,” FHA.com
- “FHA Debt-to-Income Requirements,” FHA.com
- “Maximum Mortgage Limits for 2022,” U.S. Department of Housing and Urban Development
- “Federal Housing Administration,” U.S. Department of Housing and Urban Development
- “FHA Releases 2021 Annual Financial Report to Congress,” U.S. Department of Housing and Urban Development
- “Federal Housing Administration Requirements,” FHA.com
Dina Gerdeman is a business writer and editor in the Boston area.
All Credit Intel content is written by freelance writers and is commissioned and paid for by American Express.
