Homebuyers

How to Get an FHA Loan with Lower Credit

If you are a homebuyer with little to no credit history, a government-backed FHA loan may be able to quickly and easily help you buy a house.

FHA loans are insured by the Federal Housing Administration, which allows them to have different standards than other, Conventional loans. The more flexible financial requirements for this loan type make it one of the more suitable options offered for those who have debt or other personal financial issues. This can make FHA loan programs easier to obtain than traditional loans, allowing more people to become homeowners.

However, an easier loan application does not necessarily mean less serious; preparing yourself beforehand is important to avoid common mistakes when applying for a home loan.

If the less strict requirements of an FHA loan appeal to you, then continue reading to find out exactly how to get an FHA loan when you are limited by lower credit.

What is the Minimum Credit Score for an FHA Loan?

The eligibility requirements for an FHA loan can also be more flexible than other loans. The minimum FHA loan credit score is 580. There is an exception to this rule, however. The required credit score to qualify for an FHA loan can sometimes be as low as 500, the difference is you’ll need a higher down payment when purchasing the home.

The specific down payment you’ll need to provide will be 3.5% if your FHA loan credit score is 580 or higher, and 10% if the score is between 500 and 579. If your credit score is in that 500-579 range, you’ll be required to get a subprime loan that does not contain the best mortgage terms while placing an APR (annual percentage rate) upon the loan at the same time.

Additionally, mortgage insurance will be required for the entire duration of the loan term if the down payment is less than 10%.

Requirements for Submitting Lower Credit on an FHA Loan Application

To have the best chance of a successful FHA loan application, you’ll need to meet certain criteria. While not all the below requirements are necessary to secure an FHA loan with lower credit, meeting each will improve your chance of approval:

• Credit score and down payment requirements listed above
• An employment history with a consistent (and documented) income for at least the past two years
• An allowable income sufficient to qualify for the FHA loan amount
• Not filed for bankruptcy or faced foreclosure over the past 3 years
• A residential home, listed as your primary residence, and in a livable condition - FHA loans cannot be used for secondary properties

Refinancing an FHA Loan

Using the Streamline program, an FHA refinance may still be possible for buyers with lower credit scores — or debt— who want to take advantage of reduced rates, but keep in mind that different forms of debt can influence your home loan application. 

This program will replace your current FHA loan that you borrowed with a new FHA loan that has a better rate along with lower terms. FHA refinance loans often require less paperwork, more flexible credit standards, and quicker closings.

If your credit history has worsened since the original FHA loan you were approved for, it should not prevent you from refinancing into a new FHA loan unless you have been missing payments.

Depending on the amount of equity that is carried into the new FHA loan, you may have to pay mortgage insurance premiums for the life of the loan.

FHA Loan Interest with Lower Credit

Your FHA loan interest rate will be affected if you have a lower credit score. A common occurrence for lenders is to offer a higher rate with a lower credit score, although this is not always the case.

Since FHA loans are backed by the United States Department of Housing and Urban Development (HUD), most of the government-insured FHA loans you can receive will contain extremely competitive rates. These competitive rates may be lower than other, more Conventional mortgages due to HUD. This government backing allows lenders to offer a lower rate that depends on factors such as current interest rates, income, credit score, and more.

FHA Closing Costs

Charged by mortgage lenders and others in the loan process, closing costs typically range between 2% and 6% of the home’s sale price but can vary depending on the type of mortgage. Seller credits — money that the seller gives the buyer as a purchase incentive — can in some cases entirely cover the closing costs associated with the loan. 

When applying for a mortgage, you will receive a closing costs estimate from the lender that will contain vital information regarding your loan. Then. three days before ownership of the property passes to you, you’ll receive a final closing disclosure with one last breakdown covering those specific fees that will help fully prepare you for a smooth closing.

FHA closing cost fees vary by state. They also include mortgage insurance paid upfront and prepaid items such as homeowners insurance and property taxes.

Applying for an FHA Loan with Lower Credit

The most important thing you’ll need as an FHA loan applicant with lower credit is documentation. Before submitting a loan application online, over the phone, or in person, you will need to have gathered the following information:

• The complete names of borrowers and co-borrowers
• Your current address
• Your Social Security number
• Your current job information including the business where you are employed and pay stubs
• Your credit report containing information on open loans and real estate
• Your tax returns for the last two years
• Your bank account statements
• Other information requested by your lender

After successfully submitting the above information in your FHA loan application, your lender will notify you regarding the next steps, such as the loan estimate containing the loan interest rate, terms, monthly mortgage payments, and closing costs. They will also answer any questions you have.

By outlining the steps needed to apply for an FHA loan, even those with low credit can finance their new homes. Speak to a mortgage lender before applying to ensure that your application will come back approved.