FHA already has the reputation of being a forgiving and flexible home loan. But many lenders actually place higher limits on the minimum credit score for FHA loan files. The Federal Housing Administration allows lenders to use good judgment in determining loan approval. Although credit scores do play a role in an FHA loan approval. So let’s discuss the minimum credit score for FHA loans and how to get approved with a lower score!
Minimum Credit Score for FHA
If not able to use a VA or USDA no money down purchase loan, FHA could be the next best thing. In addition to a low 3.5% down payment, FHA also allows for down payment assistance. Down payment assistance programs bridge the gap between the price and the loan amount. Although DPA programs usually have a little higher credit score requirement. For instance, SC Housing and NC Housing Finance Agency require a 640 score. But our minimum credit score for FHA without DPA is only 600. Keep in mind though, a 600 credit score does not mean automatic approval. Usually there is a reason for the 600 score and so this requires a knowledgeable lender to walk you through the process. Remember, credit scoring is a starting point but approval is possible with explanations, compensating factors, and good credit.
Using Alternative Credit on an FHA Loan
A good thing about an FHA loan and our underwriters is that not all credit must show on the credit report. So let’s say that a buyer has a 620 credit score and only has 1 auto loan reporting recently on credit. If this one trade line has been paid as agreed, alternative credit could help. Supplementing other credit references not normally reporting to credit bureaus could aid in loan approval. There are a lot of alternative credit references buyers could prove such as below
- Utilities. Gas, water, electric, cable, telephone
- Insurances. Car, renters, health, disability
- School tuition
- Cell phone
- Rent to own accounts
- Consistent savings account deposits
- Small store accounts
- Online services: Recently we used Microsoft’s Xbox Live and Apple Pay Account for credit
Keep in mind that above alternative credit sources paid directly from a paycheck do not count. Alternative credit must be paid outside of a paycheck. So payroll deducted health insurance would not count.
Rent Verification for FHA Loans With Low Scores
When in the lower 600 – 639 credit score range, a previous housing history helps tremendously. A previous housing pay history is a good indicator of how someone will pay a new house payment. So FHA lenders take rent history very seriously. The most weight is given to a rent history proven by cancelled checks. Then a buyer proving on time payment history through checks shows the buyer is the one who actually made the payments. Plus it shows they were made on time and there is no disputing this. Next, rent payments verified through a rental company is good. The weakest would be rental payments made to an individual. In cases where payments are made to individuals, additional documentation may be required. For instance, cancelled checks or proof of withdrawal from a bank account for 12 months would help.
Keep in mind, using alternative credit is not a way to ignore a bad credit report or score. Alternative credit is a way of proving a more solid or in depth payment history than the credit report shows.
FHA Loan Manual Underwriting Approval
Lower credit scores mean lenders may not receive an automated pre-approval. Normally automated preapprovals are used as a guide for lenders and underwriters to review a file. But lower scores or a recent major event such as foreclosure or bankruptcy may require manual underwriting. We have great successes in helping buyers get approved with limited credit or low scores. Therefore manually underwritten loans have the following characteristics:
- Maximum debt ratios are held to 43%
- Assets improve approval chances
- Co-borrowers other than spouse may be added (this may not offset bad credit by the borrower though)
- Alternative credit (see above)
- Rent history
- Detailed credit explanations – what caused the issue, how did you remedy, & what have you done to re-establish?
FHA Loan With 620 Credit Score Closed
So we have explained how the minimum credit score for FHA works. Now check an actual closed FHA loan with a 620 score and other hurdles. First of all, this purchase was an FHA flip, which meant the contract had to be dated 91 days after the seller’s deed transfer. Learn more about how FHA flip rules 2017 here. Next, the buyer removed 2 judgments from credit. There were 2 years of income taxes owed which were paid off at closing. Furthermore we had a 620 score, 41% debt ratio, and borrower was a commissioned sales person. But in addition to these hurdles, the buyer did have great assets in the bank. This helped a lot. We were able to work hard with the Realtor and buyer to make everything come together.
Contact Us for Your FHA Loan
Are you working with a Realtor and know you may need help qualifying, mention us. We can often approve buyers for an FHA loan when over a 600 score. Although, the higher the score, the better chance of approval. So if you have limited credit, but can provide sufficient documentation above, contact us to apply for an FHA home loan approval. We hope this helps in understanding the minimum credit score for FHA loan requirements.
We can often approve buyers for an FHA loan when over a 600 score. Chances improve with recent good credit and compensating factors. So if you have limited credit but can provide sufficient documentation, apply with us for an FHA mortgage approval. But don’t just think of FHA for credit issues as FHA is a great lending option for high score buyers too. For more FHA tips, click on the “FHA” blog category. We have a lot of helpful articles to help buyers, homeowners, and Realtors.
Author: Russell Smith
Team Move OVM Financial loan officer success is Russell’s primary focus. He provides the tools and techniques he used as a top producing loan officer. Additionally he offers the Team Move OVM Financial Agent Training Program. Sharing is so important to Russell so he works diligently to be a resource to loan originators and Realtors.