FHA Loan Credit Score Requirements (2024)

An FHA loan is a type of mortgage insured by the Federal Housing Administration (FHA) and issued by approved third-party banks and mortgage lenders.

One of the primary benefits of FHA loans is that they have less stringent financial requirements than other types of home loans. This includes lower credit score minimums. If you don’t qualify for a conventional mortgage—and your credit score is primarily to blame—you may want to consider an FHA loan.

What Is the Minimum Credit Score for an FHA Loan?

The minimum credit score for an FHA loan can vary depending on the lender. However, the FHA does have some guidelines regarding credit scores. Generally, the FHA requires a minimum 580 credit score with a down payment of 3.5% to qualify for an FHA loan.

Because FHA loan requirements vary among lenders, it’s important that you shop around. The Consumer Financial Protection Bureau (CFPB) recommends that you obtain at least three loan estimates from three different lenders.

Can You Get an FHA Loan With a 500 Credit Score?

While it’s technically possible to get an FHA loan with a 500 credit score, many lenders prefer borrowers with higher credit scores.

Under FHA guidelines, borrowers with credit scores between 500 and 579 must make a down payment of at least 10%. But they may also face tighter requirements elsewhere. For instance, lenders may require a lower loan-to-value ratio or ask that you make a larger down payment.

Overall, lenders sometimes have limited FHA options available for borrowers with especially low credit scores—and even if approved, your terms and interest rates may be less favorable.

FHA Interest Rates by Credit Score

There’s no standard industry range when it comes to FHA interest rates by credit score, but borrowers with higher credit scores are typically eligible for lower interest rates, while those with lower scores often face higher rates.

“Lenders consider credit scores as an indicator of risk, and a higher score demonstrates a lower risk profile,” says Michael Borodinsky, vice president regional manager at Caliber Home Loans.

Even if you meet the minimum credit score requirement, lenders will consider other aspects of your financial profile during the loan approval process. This includes factors such as income, employment history and debt-to-income (DTI) ratio, all of which play a role in the FHA interest rate you receive.

For example, though the FHA sets the maximum DTI for home loans at 50%, a lower DTI can signal to a lender that you manage and repay your debts responsibly, which could also help you qualify for a lower rate.

How Credit Score Requirements for an FHA Loan Are Determined

As previously stated, FHA-approved lenders may set minimums above and beyond what the FHA asks for. Participation in the FHA program is voluntary, which means lenders can decide which FHA loans to offer, what kind of credit scores to accept and any other qualifications their borrowers may have to meet.

Here are some other factors that lenders typically consider when determining credit score requirements for an FHA loan:

• Risk appetite. Lenders with higher risk appetites are more willing than others to work with borrowers with lower credit scores. As such, you can expect these types of lenders to have lower credit score requirements.
• Investor requirements. Many lenders sell the FHA loans they originate to investors on the secondary mortgage market, where they’re often pooled together and packaged as mortgage-backed securities. The pricing of mortgage-backed securities is partly influenced by interest rates, which means investors may have their own credit score requirements for the loans they purchase. Generally, the lower the credit score, the higher the risk for investors, resulting in higher interest rates for borrowers.
• Compensating factors. In some cases, borrowers with low credit scores may still be eligible for an FHA loan if they can demonstrate what’s known as compensating factors. Compensating factors are additional strengths in your financial profile that can help offset a lower credit score. These include cash reserves, low non-housing debt, residual income, a steady employment history and a larger down payment.

Tips To Raise Your Credit Score

Whether you plan to apply for an FHA loan in the future or you’re trying to bounce back from having your mortgage application denied, improving your credit score can help make you more attractive to FHA lenders and increase your approval odds. Here are some tips on how to do it.

Pay Your Bills on Time

Payment history is the single biggest factor in the calculation of your FICO credit score. Therefore, one of the best things you can do to raise your credit score is to pay all of your bills on time. Late payments stay on your credit report for up to seven years, damaging your score (although the impact lessens over time). Lenders want to see that you’re responsible enough to meet your financial obligations consistently.

Keep Your Credit Utilization Below 30%

Your credit utilization ratio is the percentage of credit you’re currently using compared to the total amount of credit available to you. For example, if you have total credit card balances of $2,000 and a total credit limit of $10,000, your credit utilization ratio is 20%. A ratio below 30% is generally considered good because it demonstrates to lenders that you’re not overly reliant on credit.

Limit New Credit Applications

Applying for multiple new credit accounts at once can raise concerns for lenders and lower your score. Apply for new credit only when necessary, and be cautious about opening too many accounts at the same time.

One exception: Credit bureaus count multiple mortgage applications submitted within a 45-day window as one inquiry, so you can explore your FHA loan options with more than one lender without worrying about the extra hits to your score.

Check Your Credit Reports Regularly

Monitor your credit report for errors or inaccuracies that could negatively affect your score. You can obtain free copies of your credit reports annually from each of the three major credit bureaus. If you find any errors, promptly dispute them.

Be Patient

Building good credit takes time, and there are no quick fixes. Be patient and make consistent efforts to practice responsible credit habits. Your credit score will improve gradually as you establish a positive credit history.