As a quick review, an FHA loan is a mortgage backed by the Federal Housing Administration (which is part of HUD). A big advantage of an FHA mortgage is that the required down payment is typically a lot lower than other mortgages. While the down payment does vary depending on the exact FHA program, 3.5% of the purchase price is common. And for our purposes today, the required credit score is also significantly lower than what most would consider to be a good score. The credit score requirements differ depending on several factors.
First, let’s consider the requirements for maximum FHA financing. The most that the FHA will finance is 96.5% of a home’s value. (In lender parlance, this is expressed as 96.5% loan to value ratio.) This means that an applicant will have to have 3.5% on hand to use for a down payment. In order to receive this sort of loan, an applicant must have a credit score of at least 580.
Other applicants may be able to qualify for loans with smaller financing ratios. Applicants with a credit score between 500 and 579 qualify for an FHA loan, but are required to make a 10% down payment instead of 3.5%. Applicants with scores below 500 are not eligible for FHA-insured financing.
Even with the minimum FICO score requirements, there are certain other requirements to an FHA backed loan. Here’s a list of these requirements an FHA loan applicant needs to meet:
- A steady employment history for at least two years. Lenders like to see that applicants are stable, which is why steady job history is a requirement for FHA backed loans.
- Your income must have remained steady or risen over the last two years. FHA backed loans have maximums based on your income, so you must prove that your income is consistent and predictable.
- You must have fewer than two thirty-day late payments.
- Any bankruptcy on your record must be at minimum two years old. Regardless of how long ago the bankruptcy was, you must have good credit for the most recent last two years.
- Any foreclosure you’ve had must be at minimum three years old. Also, you must have good credit for the past three years.
- By the time you apply for a loan, any state tax liens you have must be paid. Federal liens, on the other hand, needn’t be paid if you can show that you’ll be able to pay both the payment on the lien and the mortgage payment on your FHA backed loan.
To get an idea of what amount you can borrow with an FHA backed loan, your mortgage payment must be at or below about 30 percent of your total monthly gross income. For example, if your household income is $50,000 per year ($4,166 per month), your maximum monthly mortgage would be approximately $1,250. What kind of house that payment could buy would depend on market conditions, the relative value of homes in your area, and mortgage interest rates at the time. In a high-priced market, that might barely buy a studio condominium. In other areas, it could buy a four bedroom single family home.
Keep in mind that FHA guidelines do change form time to time. If you’re considering an FHA backed loan, check FHA.gov for resources and for approved lenders in your area. When you’re ready, apply to several lenders at the same time. If you’re approved by more than one, take the best rate offer to the loan officer at the other lenders who approved your application and ask if they can beat the offered rate. Remember, you’re paying a premium to insure your lender against risk in the event of foreclosure. Make lenders compete for your business and take the best rate. Even a small difference in interest rates can add or subtract thousands to the amount you’ll pay over the life of the loan.