The FHA loan program was devised by the Federal Housing Administration in 1934 so more Americans could buy a house with a lower down payment, lower credit score at a reasonable mortgage rate. Because the loan is guaranteed by the US government, the lender can offer more lenient credit and income standards. FHA are government insured but are not considered conforming loans like Fannie Mae or Freddie Mac.
Look at FHA Loans for Limited Down-Payment Requirements, Easy Credit Rules and Great Mortgage Rates!
In many instances with conventional home loans, the minimum credit score to get a home loan is 640 or so. That leaves a lot of people out who have lower credit score. But there is hope. The go-to loan product for Americans with bad credit and/or recent foreclosures and bankruptcies is the FHA program.
FHA mortgages are available with 15 and 30-year terms, either fixed or adjustable. In 2018, the bulk of ‘credit-challenged’ mortgages issued are insured by the FHA. In many instances, with an FHA mortgage loan, you do not need a high credit score to qualify. Some borrowers are approved for a loan with a 3.5% down payment loan with a 580-credit score. If you put 10% down, you may be able to qualify with a 500-credit score.
FHA Compensating Factors
Now, while you can qualify for an FHA loan with really poor credit, you still will need to show some compensating factors that indicate you are a reasonable risk for the lender.
First, you should be able to show that you had a financial hardship in the past that led to your poor credit. For example, you may have had a foreclosure during the last recession that was because of a job loss, investment loss, etc. That happened to millions of American families, and that is okay. But at least one or two years should have passed since the foreclosure, and you will need to show that you have recovered financially since then. This means you should have a strong record of paying your bills on time for at least the last year.
Other compensating factors for a poor credit score to qualify for an FHA loan are:
- Bigger down payment of 10% or more
- Low debt to income ratio – little credit card debt
- Higher income than average for your area
- Little overall debt
- More cash in your savings account
- Been with current employer for many years
- Currently paying rent in a similar amount to your proposed mortgage payment
If you locate the right FHA specialist, you may be able to get approved with 580-fico scores, and you may only need as little down as 3.5%. If you need help with the down payment, you can get it. FHA allows you to receive the down payment as a gift from a friend or relative. And because the mortgages are backed by the government, you may be able to score a very good interest rate as well. FHA mortgages, for example, often carry interest rates that are slightly less than conventional rates. Even with a 620-credit score, you may get an mortgage rate on an FHA mortgage that is as low as advertised. That is a great deal for someone with a poor credit score.
Remember with FHA mortgage programs, you might be able to get a loan even if you have little to no credit history at all. In that case, you would need to provide an alternate credit history with utility and rent payments.