Do I Need Good Credit for an FHA Loan?

Dated: 06/21/2018

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Question: "I have heard that FHA home loans are easier to get than regular mortgages. It this true? I'masking because I have a bad FICO credit score. My score is currently in the low 500 range. Do I need good credit to get an FHA loan? If so, what is the current limit or cutoff point for approval?" Yes, your credit score will be a major factor in the approval process. This three-digit number has the power to make or break your loan. Here is what you should know about the relationship between FHA loans and credit scores: * Credit is only one piece of the mortgage qualification, underwriting and approval process. Lenders will also look at your monthly income, the current amount of debt you are carrying, and other financial factors. So while a good FICO score will certainly help you get approved, there are other things you need to consider as well. Lenders are concerned with the big picture, more than any in dividual factor. * Generally speaking, it's easier for bad-credit borrowers to qualify for an FHA loan than a conventional loan (one that is not insured by the federal government). With an FHA mortgage, the lender is insured against losses that might result from borrower default. So they are generally more willing to work with people in your situation, those with lower-than-average credit scores. * Over the past few years, the FHA has become more strict with their views toward consumer credit. In the past, they haven't had much of a policy toward FICO scores. It was mostly the lender's call. But that is beginning to change. For instance, in 2013 they announced a new rule that requires manual (i.e., stricter) mortgage underwriting for borrowers with credit scores below 620 and debt-to-income ratios above 43%. * Mortgage lenders that offer FHA loans can establish their own credit requirements, on top of those established by the Federal Housing Administration. These are known as "overlays." So you basically have to meet two sets of requirements -- the lender's, and the federal government's. So yes, FHA loan approval will depend on your credit score and other factors. Keep in mind also that you will pay a higher interest rate when you borrow with a low FICO score. For example, consider the following quote from the Chicago Sun-Times: "A homeowner with a $100,000 mortgage and a 520 credit score will pay $110,325 more in interest charges over the life of a 30-year loan than a homeowner with ... a credit score of 720 [as a result of the higher interest rate charged to the first homeowner]." This applies to conventional mortgages and FHA loans alike. The lender sets the interest rate on your loan, and they will partly determine the rate by your credit picture. If this doesn't motivate you to boost your score, nothing will. Disclaimer: This answer is provided for educational purposes only. In the end, only a mortgage lender can tell you whether or not you meet their guidelines for the FHA loan program. So it might be in your interest to speak with one, even if you think your score is too low.

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