This blog post is part of an ongoing series in which we answer frequently asked questions regarding FHA home loans. Today’s question is: What is considered a good FICO credit score for getting an FHA loan?
Here’s the short answer. The Department of Housing and Urban Development requires borrowers to have a “minimum decision credit score” of at least 500 to qualify for an FHA loan. But most mortgage lenders won’t go that low, and they have the ultimate say as to whether a person is qualified for financing. A 580 or higher is needed to qualify for the 3.5% down payment. These days, most people who use FHA loans have a FICO credit score of 600 or higher.
Understanding the Terminology
Let’s define some of the terms being used here, before we go any further:
A FICO credit score is one that is computed by using the FICO scoring model developed by the Fair Isaac Corporation. There are several different scoring systems used to to produce consumer credit scores, but the FICO score is the one most commonly used by mortgage lenders. It ranges from 300 to 850, with a higher number being better.
An FHA loan is one that is insured by the Federal Housing Administration. This federal agency is part of the Department of Housing and Urban Development. They insure mortgage lenders for losses that might result from borrower default. As a result of this added protection, lenders are generally more flexible with their qualification requirements when offering FHA loans. This program also offers a relatively low down payment of 3.5%.
What Is a Good FICO Credit Score for an FHA Loan?
Getting back to the question at hand: What is considered a good FICO credit score for an FHA home loan?
There are several key requirements you’ll need to meet in order to qualify for a government-backed mortgage. Borrowers must make a down payment of at least 3.5%. Additionally, you’ll need to have a manageable level of debt in relation to your monthly income. And then there’s the credit score. Borrowers need to have decent credit in order to qualify for an FHA loan — or any other type of mortgage for that matter.
- According to HUD, borrowers need a score of at least 500 to be eligible for this program.
- If you want to qualify for the 3.5% down payment option mentioned earlier, you’ll need an even higher score. HUD requires borrowers to have a score of 580 or higher to be eligible for maximum financing of 96.5%.
- Borrowers with scores between 500 and 579 might still be eligible for the program, but they will have to make a larger down payment of 10%.
But those are just the official credit guidelines for an FHA loan, issued by the Department of Housing and Urban Development. Mortgage lenders also have a say in all of this. In fact, they can impose their own guidelines on top of those issued by HUD. This is referred to as an “overlay.”
These days, most lenders prefer to see a FICO credit score of 600 or higher for FHA loan applicants. That number is not set in stone, but it does represent current industry trends as explained below.
Additional Insight from a Mortgage Software Company
In June 2017, the mortgage origination software company Ellie Mae published its latest origination insight report. This insightful report reveals a wealth of data relating to home loans that are originated through the company’s software. It is one of the best indicators of current mortgage lending trends and standards. It can also help us answer the question, what is a good credit score for an FHA loan.
According to the company’s latest report, most borrowers who used the Federal Housing Administration loan program had scores of 600 or higher. Here is the distribution breakdown:
- 500 – 549 FICO: 1.55%
- 550 – 599 FICO: 3.91%
- 600 – 649 FICO: 21.66%
- 650 – 699 FICO: 35.57%
- 700 – 749 FICO: 23.3%
- 750 and up: 13.68%
Here’s a look at the average FICO scores from that report.
As you can see, most of the FHA loans that successfully closed had credit scores of 600 or higher. But there was a relatively small percentage of borrowers with scores below 600. So while 600 and up could be considered a “good” FICO credit score for an FHA loan, it is still possible to qualify if you fall below that mark. At least, that’s what the data show us.
Disclaimer: Every lending scenario is different because every borrowers different. The official credit cutoff point for FHA loan eligibility is 500, as mentioned in HUD handbook 4000.1. A 580 or higher is needed for a 3.5% down payment. Those are the official guidelines. Mortgage lenders can set their own guidelines as well, and these vary from one company to the next.