FHA loans have many perks, especially their low 3.5 percent required down payment, which comes at a good time for many borrowers that are just now recovering from the economic recession. What many borrowers do not realize is the relaxed credit requirements that the FHA has implemented as well. What used to be a 640 minimum requirement for a borrower’s credit score is now only 600. That is a 40 basis point difference, which can open up the possibility of obtaining an FHA loan to many more borrowers.
Your Overall Credit History
What plays a more important role in the eyes of the lenders offering FHA loans is not your credit score, but your credit history. Every lender has its own requirements, but in general, they are looking at your 12-month history. They will pay close attention to the mortgage history, but will also look at the history of other payments as well. If you have recent history of late payments or defaults, your credit score will not play a factor in approving or denying your loan. Lenders do not want to see recent late payments. On the other hand, if your 12-month credit history is clean, yet your credit score borders around 600, they are more likely to give you a chance on an FHA loan than any conventional loan.
The Role of the Credit Score
If lenders strictly focus on the credit history rather than the score, what role does the score play in a loan? For the most part, it is to ensure that you meet the minimum requirements in order for the FHA to insure the loan in the event of default. In reality, the FHA will not insure a loan that has a FICO score of less than 580. That being said, it is rather difficult to find a lender that will offer financing for a credit score of that nature, simply because of the vast amount of loans that they have had to buy back after the housing crisis in the face of millions of dollars of default. Most lenders will stop offering FHA mortgages to those borrowers that have a credit score lower than 600.
Higher Down Payment
Another factor that your actual FICO score plays in the role of the FHA loan is the amount of the required down payment. In general, a 3.5 percent down payment is required in order to obtain an FHA loan, which is among the lowest down payment requirements from any loan option. This is only true if your credit score is above 600 though. If it is between 580 and 600, you will be required to put down at least 10 percent as a down payment in order to secure the FHA loan. This decision is not based on your credit history, whether good or bad; it is strictly based on your credit score.
Shopping for FHA Loans
FHA loans are not the same with every lender. If you are in the market for a loan backed by the FHA, it pays to shop around with various lenders. Every lender will have their own credit score requirements and other stipulations that they will abide by in order to keep their portfolio low risk. Wells Fargo, for example, was the latest bank to offer FHA loans to those borrowers with a credit score as low as 600, reducing the regulations from the previous 640. Many other lenders also offer the same basic requirements, while others will not. Knowing your credit score and your basic credit history will help you determine where you should start your search and what you should look for in terms of down payment requirements and overall eligibility for a loan.Click to See the Latest Mortgage Rates»