Is There A Minimum Credit Score for an FHA Loan?

Many people are quick to point out that FHA does not have a minimum credit score requirement in their underwriting guidelines.  While this is technically true, virtually every FHA approved lender does impose a minimum credit score requirement for FHA loans because of increased losses on low FICO borrowers.  Furthermore, most lenders have some type of interest rate adjustment for FHA borrowers who have credit scores below 600-620.  There are only a small handful of lenders that will still approve FHA buyers with less than a 580 credit score, and every one that I know of requires an automated underwriting approval and a substantial rate adjustment.  In other words, if your credit score is less than 620, it will be hard to find an FHA loan at the absolute best rates that are offered by lenders.

Of course, simply having a credit score above the minimum does not guarantee a loan approval.  There are many other factors that may have a positive or negative effect on the likelihood of approval.  For borrowers with less than perfect credit, underwriters will weigh heavier on other compensating factors that may help to show the borrower is at a low risk of default, such as:

• Cash reserves (how much money will the buyer have left in savings after closing).
• Debt-to-income ratio. 
• Credit Depth and experience.  Anyone with one credit card can have a 720 credit score, but that doesn't automatically mean they are a low risk of defaulting on a mortgage.
• Payment shock (amount of increase from current cost of housing)
• Employment and income.
• Extenuating circumstances beyond the borrower's control that contributed to past credit and financial issues.  If it can be shown that these issues are resolved and not likely to occur again in the future, they can be taken into consideration.

A great example is a buyer who has a significant amount of savings, either in bank accounts or in 401K/retirement savings (cash reserves).  Obviously, buyers who have shown the ability to save money have a lower likelihood of late payments and default because they have something to fall back on in case of illness, unemployment or any one of life's unexpected events that tends to cause financial burdens.  

It's likely that lenders may continue to raise their minimum credit score requirements if foreclosures and bank losses continue to increase.  Those considering purchasing a home should take extra steps to optimize their credit score to avoid falling below the minimum requirements.