December 8, 2022

FHA Minimum Credit Scores – How Does My Credit Score Compare To Other Borrowers?

Last year the FHA instituted minimum credit score requirements necessary to qualify for FHA loan approval.

Many borrowers who wind up being turned down for FHA financing due to low credit scores often wonder how their credit scores compare to other borrowers.  Despite the financial pressures on households due to higher prices, stagnant incomes and a recessionary economy, a surprisingly large number of consumers have maintained high credit scores.

According to Experian, one of the major credit reporting agencies, 58% of all consumers have a credit score of 700 or higher and 73% of all consumers have a credit score of 650 or higher.  The range of credit scores with the percentage of consumers in each range is shown below.

Theoretically, based on the FHA’s minimum credit score requirements, less than 7% of all consumers would not be qualified for FHA financing.

The FHA specifies that only borrowers with a credit score below 500 are not eligible for FHA insured mortgage financing.  From a practical standpoint, however, the minimum FHA FICO score requirements are meaningless to many borrowers.

Although the FHA has established credit score eligibility guidelines, the individual FHA lenders (banks and mortgage companies) have established their own credit overlays for FHA borrowers which are usually much higher than FHA specified minimum scores.  The end result is that a borrower meeting the credit score requirement guidelines set forth by the FHA may not necessarily wind up obtaining loan approval from the actual lenders who underwrite and approve FHA loans.

For example, FHA guidelines specify that a borrower with a credit score of between 500 to 579 is eligible for FHA financing with a 10% down payment, and borrowers with a score of 580 and above are eligible for maximum financing with only a 3.5% down payment required.  Realistically, however,  FHA applicants will discover that most FHA lenders will usually require a minimum score of at least 640 to be considered for FHA financing.

Any borrower considering FHA financing for a home purchase or a refinance should first contact a mortgage lender to determine credit eligibility.  If a borrower is not credit qualified, some FHA lenders have sophisticated software that allows them to evaluate the overall credit situation and offer concrete solutions for quickly improving credit scores.  If the lender you are dealing with does not offer this option, shop around to find a lender that offers this free benefit.  It could wind up making the difference between an approval and a loan turn down.