The FHA has established minimum credit score requirements in order to be eligible for FHA financing.
The FHA guidelines specifically exclude from eligibility any borrower with a FICO score below 500. Theoretically, any borrower with a credit score above 500 can be approved for an FHA loan but realistically, the lower the credit score, the more difficult it becomes to actually obtain FHA loan approval.
Borrowers with a FICO score between 500 to 579 are eligible for FHA-insured mortgage financing but are required to make a 10% downpayment and be able to verify sufficient income. There are actually very few borrowers that wind up obtaining an FHA mortgage under these requirements. A low credit score is indicative of a high level of mismatch between a borrower’s debt obligations and income, resulting in late or defaulted loan payments. Under these circumstances, it is highly unlikely that a potential borrower would be able to accumulate a 10% downpayment.
Borrowers with credit scores above 580 are eligible for maximum FHA financing and are required to make only a 3.5% downpayment. From a practical standpoint, however, it has become extremely difficult to obtain FHA loan approval unless the borrower’s credit score is above 620. This is due to the fact that FHA lenders have established their own credit criteria for loan approval which exceeds the FHA guidelines. Most of the largest banks that make mortgage loans under the FHA lending program require a minimum FICO score of 640.
The FHA and the banking industry have dramatically tightened underwriting criteria for loan approval due to the collapse of housing values and the large number of mortgage defaults. A borrower applying for an FHA mortgage today with a FICO score below 620 has a very low chance of being approved.
At the peak of the housing bubble in 2007, a huge 45% of FHA loans were approved for borrowers with credit scores below 620. In 2008, the number declined to 33%, in 2009 to 14% and in 2010 to only 4%. The number of borrowers approved for FHA insured mortgage loans with a credit score below 620 declined to 3% in 2011.
Borrowers with a credit score above 660 have the best chance of being approved for FHA financing as can be seen in the graph below. In 2011, 70% of all FHA mortgage loans were given to borrowers with a credit score of 660 or higher.
