In 2017, an FHA policy update relaxed credit score requirements and allowed more flexibility and approvals for applicants with lower credit scores.

What are the credit score requirements for FHA loans in 2022?

To buy a home in 2022, the Federal Housing Administration, or the FHA, requires applicants to have a minimum credit score of 500 to receive approval for an FHA loan. Borrowers need at least a 580 to obtain approval for the minimum 3.5% down payment, but often lenders require a higher score of 620 to 650 to be eligible.

However, thanks to the policy update in 2017, many lenders relaxed their minimum credit requirements for FHA loans, allowing applicants with lower credit scores to apply for home loans.

Analysts predict the update could allow up to 100,000 more families to purchase property with an FHA loan per year.

More than 40 million families have bought or refinanced property since the FHA loan program was founded in 1934. The flexibility the program provides makes it a very popular loan option as it was created to provide home buying options to people who otherwise couldn’t qualify for home loans.

What is the minimum credit score needed to buy a house?

FHA loans are available to borrowers with credit scores between 500 to 580, but it depends on the amount you’re able to put down on the home. Standard loans and VA and USDA loans have set minimum credit scores needed to qualify, but lenders often require at least a 620 credit score or above.

Though some loans accept lower credit, it is important to remember that lower credit typically means you’ll have a higher interest rate on your loan.

This table outlines each type of loan, the minimum credit score, and to who the loans are typically granted. It includes FHA, VA, and USDA loans. 

FHA loans beat conventional loans on flexibility

Though the conventional loans that mortgage giants Fannie Mar and Freddie Mac offer have their purpose in the market, they are not the more flexible loan option. FHA loans help close the gaps by offering loan options to people with:

●      Low to mid-range credit score

●      Low income

●      Income from multiple sources

●      Co-borrowers not planning on living in the home (non-occupant co-borrowers)

●      Down payment that was gifted without the borrower providing any of the payment themselves

●      Properties needing repairs or renovations

If FHA loans weren’t available, millions of homeowners in the United States would be left to rent much longer than needed. However, there is always room for the FHA to expand its capacity to work with more aspiring homeowners.

FHA lenders don’t always abide by the FHA minimum credit score requirements

Though the FHA sets guidelines, banks and mortgage lenders aren’t required to follow them to the letter. These for-profit private companies process FHA loans and base their decisions on directives the FHA provides.

Lenders across the United States often have stricter requirements for FHA loans than the actual government agency. This is because the FHA penalizes lenders that approve too many FHA loans that default. It is statistically proven that lower credit score borrowers default on their loans more often than those with higher credit scores. Thus, this is why lenders often have a higher minimum credit score than the FHA guidelines outline.

Here are the minimum credit score imposed by FHA:

●      580 credit score or above: Eligible for 3.5% down payment

●      500-579 credit score: Still elibigle but must put 10% down

●      500 credit score or below: Not eligible for FHA financing

Though these are the FHA minimums, most lenders require applicants to have between 620 to 640 to qualify for a loan. However, the number may become lower due to the policy change in 2017.

FHA policy updates make it easier for borrowers with low credit to qualify

The FHA added an additional measurement tool to evaluate lenders to determine whether or not the lender is high-risk in 2017.

Former Policy

Before the police update, the FHA’s only evaluation method was comparing mortgage lenders in the same general region of the country. If the lender had 150% more late-paying loans compared to other lenders in the area, they risk being removed from the FHA’s approved lenders list.

However, this method has serious blind spots that many lenders take issue with as it doesn’t consider certain factors. For example, if nearby lenders had enforced stricter FHA eligibility requirements for applicants, they’d have a better book of loans, and other lenders in the area would look worse comparatively. This policy led to lenders raising their minimum required FHA credit scores for applicants to match their competitors. It made it so the FHA’s guidelines directly conflicted with its mission to provide accessible home loans to less-than-perfect borrowers.

Updated Policy

Though the FHA didn’t completely do away with the “compare ratio” method altogether, it did add another evaluation method to help.

With the updated policy, the FHA discerns between late-paying loans based on the borrower’s credit scores of:

●      Less than 640

●      Between 640 and 680

●      Greater than 680

How does this help borrowers with lower scores?

With borrowers’ credit scores now taken into consideration, a lender no longer risks losing its FHA credentials if lower credit score loans perform similarly to similar loans from other lenders. The comparison is also no longer just limited to the lender’s local region and is compared to lenders nationwide.

Here’s how the new policy might play out in real life. Lender A issues 100 loans to applicants with a credit score below 640. Three of those 100 borrowers eventually default on their loan payments, giving Lender A a 3% “bad loan” rate. Across the street from Lender A, Lender B issues 100 loans to applicants with a credit score above 680. Only one of those 100 borrowers does not make the monthly mortgage payments, giving Lender B a 1% “bad loan” rate.

The former policy that didn’t consider credit scores would put Lender A at risk of being taken off the FHA loan approved lenders list. His “compare ratio” is 300%, which is double the accepted level. This fact would require Lender A to raise their minimum required credit score to 680 to qualify for an FHA loan.

With the updated policy, Lender A might still be okay because the FHA now compares their default rate to the national average for loans with borrowers with a 640 or below credit score.

Now, Lender A can continue helping lower-income aspiring homeowners and help fulfill the FHA’s mission.

In short, the update will likely help maintain the number of lenders available to loan applicants with credit scores that don’t meet the credit requirements for conventional mortgages.

When are lower credit score borrowers able to apply for an FHA loan?

Since the policy was issued in 2017, your lender of choice may have already changed its policies.

When updates like this happen, there is typically a trickle-down effect across the lending landscape. When one lender decides to loosen their requirements, other lenders follow suit until a majority operate similarly. If the new standards are successful, lenders will loosen their requirements a bit more.

FHA Loan FAQs

What credit score is needed to purchase a home?

Though no legal minimum credit score is needed for an FHA home loan, most FHA lenders require applicants' FICO scores to be between 500 and 580. The credit score needed to qualify is also often directly tied with how much a borrower is able to put down on the house. VA, USDA, and conventional mortgages typically require a score between 620 to 640.

What credit score is needed for first-time home buyers?

There are mortgage loan programs for first-time home buyers that allow for lower credit scores. FHA loans, for example, are available for applicants with credit scores as low as 500, though they will come with a sizeable 10% down payment. For borrowers with a score of 580 or above, FHA loans with a 3.5% down payment are available.

Can borrowers with a credit score of 500 purchase a home?

Technically, under FHA guidelines, yes. However, it may prove difficult. Since there is no law in place stating the minimum credit score needed to buy a home, a lender can offer loans without considering the borrower’s credit history at their discretion. But today, it is rare for lenders to approve loans with applicants with a 500 score. FHA loans are really the only option in this case, and most FHA loans need a 10% down payment if the borrower’s score is 500.

FICO 8 or FICO 9?

Most lenders use a borrower’s FICO score to determine their credit worthiness. Developed by Fair, Isaac, and Company in 1956, FICO is a credit scoring model and risk analysis system. There are three major U.S. credit reporting companies that most lenders refer to when reviewing loan applicants’ FICO scores: Experian, Equifax, and TransUnion.

What is the quickest way to raise my credit score?

Credit scores are calculated based on many factors that include your payment history, credit utilization ratio, credit history, and credit mixture. Some of these components are calculated quickly, and others may require months to be accurately determined. This, unfortunately, means there’s no sure way to accurately predict how long it takes to improve your credit score. The best thing you can do is to begin accruing a history of on-time payments, which is the most important factor contributing to a good credit score.

What credit score does a first-time borrower need?

People buying their first homes need a credit score of at least 500 to qualify for an FHA loan. However, a 500 will mean you need to put down 10% of the home’s purchase price. If your credit score is 580 or above, you are eligible to qualify for a 3.5% down payment.

What makes a first-time home buyer ineligible for a loan?

To be approved for first-time homebuyer programs, borrowers aren’t allowed to have any record of home ownership or co-ownership in the past three years. Aside from that, they’ll need to meet the requirements set by their lender of choice to assure the lender they can keep up with the payments. If you have a high debt-to-income ratio, a lender might not qualify you for a loan.

What is the minimum credit score FHA will accept?

500 is the lowest credit score required to be eligible for an FHA loan, but it will come with a steep 10% down payment requirement. If your credit score is 58- or above, you are eligible to receive a loan with only a 3.5% down payment.

I have a 650 credit score. Am I eligible for a first-time home loan?

650 is well within the range many lenders are willing to work with for first-time home buyers. Though you will likely get a loan, your interest rate might be higher.

What minimum credit score is needed to buy a house with 5% down?

Your credit score needs to be at least 580 to qualify for an FHA loan with a 5% down payment. Credit scores between 500 to 579 require a 10% down payment to qualify for an FHA loan.

Is 700 a good credit score to purchase a home?

A credit score of 700 or higher is likely more than sufficient to buy a home. However, that’s not the only factor lenders consider. Your income and debt obligations also need to meet their standards as well.

What is the standard credit score needed to buy a house?

Conventional mortgages require at least a 620 credit score to purchase a home. Since many home buyers use standard loans, 620 could be considered the standard score needed to buy a house.

However, you can still purchase a home with a score below 620, especially with an FHA loan that only requires its borrowers to have a score of 500. The government-backed loan option allows for more aspiring homeowners to purchase homes.

A credit score of 500 and below is considered bad, which makes it hard to qualify for a loan.

What is the best credit score to buy a house?

A score of 700 or above usually provides the best financing options for loan applicants, generally speaking—the higher your credit score, the lower your mortgage rates. A lower interest rate can save you thousands of dollars a year, depending on your mortgage.

However, with an FHA loan, you don’t need to wait to have a great credit score to qualify for a home loan since they approve loans for borrowers with scores as low as 500. If you improve your credit score dramatically in the future, you can always refinance your loan.