News alert (May 13, 2020): Some lenders have increased FHA credit score requirements in 2020, due to the ongoing economic crisis. Learn more here.
This article explains the minimum credit score requirements for FHA loans in 2020. It is intended for home buyers and mortgage shoppers who plan to use an FHA-insured loan to buy a house in 2020.
At a Glance: In a hurry? Here's the gist of this lesson in 100 words or less. The official (government-imposed) minimum credit score for an FHA home loan is 500. In order to take advantage of the 3.5% down-payment option, however, you will need a score of 580 or higher. Borrowers with scores between 500 and 579 are required to put more money down, at least 10%.
Mortgage lenders frequently set their own minimum credit-score requirements for FHA loans, and they are usually higher than the official cutoff. In 2020, most lenders want to see a score of 600 or higher. But some are beginning to ease their standards a bit.
FHA Credit Score Requirements in 2020, According to HUD
The Department of Housing and Urban Development (HUD) manages the FHA home loan program. They also set the rules for credit scores, down payments, debt ratios, and other eligibility criteria. They are the official source for rules and guidelines.
According to HUD, mortgage lenders must "determine the borrower's minimum decision credit score (MDCS) ... The MDCS will be used to determine the maximum insured financing available to a borrower with traditional credit."
Here is how HUD defines the MDCS:
- When the lender pulls three scores (from Experian, TransUnion and Equifax), the middle number must be used for FHA qualification purposes.
- When two scores are pulled (from two of the three credit-reporting bureaus), the lower number must be used to determine eligibility.
- When only one score is obtained, that becomes the MDCS.
The table below shows the minimum credit score for FHA eligibility in 2020. This table was adapted from a draft version of HUD's Single Family Housing Policy Handbook, which was published earlier this year
|If your score is...||Then you are...|
|580 or higher||eligible for maximum financing (96.5% LTV)|
|between 500 and 579||limited to a maximum LTV of 90%|
|499 or lower||not eligible for an FHA-insured mortgage loan|
As you can see from the table above, the minimum score required in 2020 is 500. That is the absolute minimum for borrower eligibility. If your "decision" credit score is below 500, you won't be able to qualify for an FHA-insured mortgage loan (according to current HUD requirements and guidelines).
Separate Policies for "Insufficient History"
HUD has additional procedures for borrowers who don't have a sufficient credit history. According to the aforementioned policy handbook: "Borrowers with non-traditional or insufficient credit histories are eligible for maximum financing, but must be underwritten using the procedures in Manual Underwriting."
This just means you can't receive an automatic approval through the FHA's automated underwriting system. Your financial history must be manually reviewed (by a human instead of a computer) to determine program eligibility. You might still be able to qualify for an FHA loan, even with a non-traditional or insufficient credit history. But it will require some extra steps, and may take longer as well. Speak with a HUD-approved mortgage lender to learn more.
Lenders Can Set Higher Minimums (Known as 'Overlays')
To recap, the minimum credit score needed for an FHA in 2020 is 500. But there's a catch. Most mortgage lenders today will not offer financing to a borrower with a score that low.
Remember, you're not borrowing money from the Federal Housing Administration. You're borrowing it from a lender in the private sector. The loan is only insured by the FHA. So you have to meet the lender's minimum credit-score requirements in addition to HUD's guidelines.
Most lenders set their standards higher than the official program minimums shown in the table above. This is known as an "overlay," because the mortgage company is laying its own requirements over HUD's. Because of these overlays, a borrower who meets FHA's minimum score requirement could still be turned down by the lender.
It raises the question: What credit score requirements are mortgage companies using in 2020, for borrowers seeking an FHA loan? This is a harder question to answer because it varies from one lender to the next. There is no industry-wide rule. Based on our research, it seems most are drawing the line somewhere between 600 and 620 these days. They might require even higher scores for conventional (not government-insured) home loans. But for FHA, the current minimum seems to lie between 600 and 620.
Just note that these numbers are not set in stone. Lenders often make exceptions for borrowers who have strengths in other areas, such as a long history of paying bills on time.
HUD Wants to Increase Lending to 'Underserved' Borrowers
A few years ago, HUD launched an initiative to get lenders to relax and lower some of their overlays, particularly where credit scores are concerned. It's all part of their "Blueprint for Access" program. According to the program announcement:
"... the average credit score for loans sold to [Freddie Mac and Fannie Mae] is 752. Currently, there are 13 million people with credit scores ranging from 580 to 680. Shutting these consumers out of the market hurts American families ... FHA is committed to finding ways to responsibly increase access for underserved borrowers."
The Department of Housing and Urban Development is currently revising their policies and procedures to reduce lender overlays. According to HUD, lenders often impose these overlays because they are fearful of "back-end enforcement actions" resulting from improper underwriting and loan origination. In other words, they are afraid of being penalized for making bad loans, and later having to repurchase those loans. So HUD and FHA officials are currently working with lenders to ease these fears and, by extension, reduce the overlays on FHA credit score requirements.
"We want to work with lenders to provide clarity and transparency in FHA's policies
to encourage lending to qualified borrowers across the credit spectrum," HUD officials stated. "Our initial efforts are paying off as some lenders are already beginning to reduce overlays."
What does it all mean? It means that lenders may soon lower their minimum credit-score cutoffs for FHA borrowers. We do not anticipate that they will drop them all the way down to 500, where the official HUD cutoff begins. But we may see the industry norm drop to 600 or even into the upper 500s sometime in 2020.
Bottom line: The only way to find out if you are qualified for an FHA loan is to apply for one. The lender will evaluate your credit score, your debt-to-income ratio, and other risk-based factors to determine whether or not you meet their minimum guidelines. And remember, standards vary from one company to the next. So be sure to shop around. You might get a "no" from one lender, and then turn around and get a "yes" from another. It happens all the time.
Wells Fargo Lowered Their FHA Score Requirement to 600
A couple of years ago, Wells Fargo announced they were lowering their minimum credit score requirement for FHA loans from 640 to 600. This is big news for a couple of reasons. First of all, Wells Fargo generates more home loans than any other lender in the U.S. Secondly, going from 640 to 600 is a fairly large reduction.
As a result of this change, tens of thousands of previously unqualified borrowers could now qualify for an FHA loan through Wells Fargo. Why did they do it? According to executive vice president Franklin Codel, it has a lot to do with legal settlements last year that allowed the lender to move away from bad-loan penalties.
"Putting those issues behind us has allowed us to get much more comfortable and we are starting to open up our credit box," Codel explained.
What to Do if You Have Bad Credit
The 2020 minimum credit score for FHA loans is 500. Most lenders require a score of 600 or higher, though some are relaxing their standards below this point. Despite this easing trend, borrowers who fall below the 600-or-up threshold may have a harder time qualifying for an FHA-insured mortgage. But that doesn't mean they are powerless. There are things you can do to improve your score.
Most importantly, make sure you pay all of your bills on time -- especially credit cards and installment loans. Your payment history on these types of accounts influences your credit score more than any other factor. Even a single late or missed payment can drop your FICO score by 50 - 100 points, depending on the circumstances. If you want to improve your credit situation, you have to pay all of your bills on time. There is no way around it.
Reducing your debt burden could also boost your score, especially if you are "maxed out" on one or more of your credit cards. According to myFICO, the company that created the FICO scoring model: "when a high percentage of a person's available credit is being used, this can indicate that a person is overextended and is more likely to make late or missed payments." This in turn can lower your score.
Disclaimer: We make no claims or guarantees that the steps outlined above will actually improve your FICO numbers. Every scoring scenario is different because there are many variables involved. This article has been provided for educational purposes and does not constitute financial advice.