A recent report from a leading mortgage software company showed that a credit score of 550 or higher might be needed to qualify for an FHA loan in 2021.
That’s quite a bit higher than the official minimum credit score of 500, and it illustrates a key point borrowers should understand. Mortgage lenders can set their own credit-score requirements for FHA loans, and those are usually higher than the minimums required by the Federal Housing Administration.
Let’s take a closer look at the credit score needed to qualify for an FHA loan in 2021.
What Credit Score Is Needed for an FHA Loan In 2021?
In December of 2020, the mortgage industry software company Ellie Mae published its latest “Origination Insight Report.” This company’s software programs are used by mortgage lenders across the country. As a result, there aptly named “insight reports” give us a deeper insight into current mortgage lending standards, trends and requirements.
These reports provide data for all of the major loan programs, including FHA, VA and conventional mortgages.
Their latest report (published at the end of 2020) showed that borrowers probably need a credit score of 550 or higher to qualify for an FHA loan in 2021. But that number is not set in stone. It simply represents a common threshold for qualification across the mortgage industry.
The report also showed that some borrowers with scores below 550 are able to qualify for FHA-insured mortgage loans. But those cases are rare, based on the latest data. Most FHA loans are going to borrowers with credit scores of 550 or higher. That will likely be the case in 2021 as well.
Note: The trends and statistics within the Ellie Mae report are based on the FICO credit-scoring range, in particular. There are different types of scoring models, but the FICO is the one most commonly used by mortgage lenders. This is true for FHA and conventional home loans. So the rest of this article will focus on the FICO credit score in particular.
It’s also worth mentioning that a higher score could help you qualify for a lower interest rate. And we’re seeing some very low mortgage rates right now, among well-qualified borrowers.
Having a 600 or Higher Is Even Better
According to Ellie Mae’s findings, 98.64% of FHA loans in December 2020 went to borrowers with credit scores of 600 or higher. Think about that statistic for a moment. This means that the vast majority of borrowers who use an FHA loan to purchase or refinance a home have credit scores of 600 or higher.
A smaller percentage of loans went to borrowers with credit scores within the 550 – 599 range. According to Ellie Mae, 1.24% of total FHA loans in December fell into this lower tier.
Once you get below 550, loan processing volume drops off considerably. That same month, only 0.11% of FHA loans had credit scores less than 550.
So, what can we learn from these statistics? Three things:
- Based on these trends, it seems that a credit score of 550 or higher is needed for an FHA loan in 2021 — in most cases, anyway.
- Most mortgage lenders want to see a score of 600 or higher. If you fall within the 550 – 599 range, you could still qualify for an FHA loan in 2021. But you’ll probably have to shop around a bit more to find a lender.
- Lastly, we can see that having a credit score below 550 could be problematic. Very few loans are going to borrowers within that range.
Lenders Usually Set the Bar Higher Than the FHA
As we’ve written elsewhere on this site, the official minimum credit score needed for an FHA loan in 2021 is 500. To qualify for the 3.5% down payment option, borrowers need a score of 580 higher.
Again, those are the official requirements found within the HUD handbook that applies to FHA loans. The entire program is managed by the Department of Housing and Urban Development (HUD). The 500/580 minimums mentioned above are straight out of HUD Handbook 4000.1, also known as the Single-Family Housing Policy Handbook.
Mortgage lenders, however, can impose their own standards and requirements — and they usually require a higher credit score for FHA loans than the minimums imposed by HUD. That’s true in 2021 as well.
Based on the origination insight report from December, it seems that FHA loans with credit scores below 550 are extremely rare. Technically speaking, a borrower with a score of 580 qualifies for the program and the 3.5% down payment option. But most mortgage lenders want to see a higher score, when screening loan applicants.
Bear this in mind, if you’re considering using an FHA loan to buy a home in 2021.
Disclaimer: This article explains what credit score might be needed to qualify for an FHA loan in 2021, using data provided by third-party sources. Aside from the official HUD requirements, none of these numbers are “written in stone.” Different mortgage lenders have different standards when it comes to credit scores, debt ratios, and other eligibility criteria. The only way to find out if you qualify for an FHA loan is to apply for one through an approved lender.