February 6, 2023
If you do not know your credit score when you start reading this article, it’s best to plan to pull your credit reports as soon as possible after reading.
If you want to get properly ready for a home loan application, you should know your credit score, the contents of your credit report, and whether you need to challenge or correct information on your credit reports.
FHA Loan Credit Standards
FHA loan rules for credit and FICO scores are minimum requirements. The minimums acceptable to the FHA are a baseline for the lender who may add higher credit score requirements depending on a variety of circumstances.
What we’re discussing here are the FHA rules, lender requirements will vary.
The FHA “Minimum Decision Credit Score” (MDCS)
HUD 4000.1 is the FHA Single-Family Home Loan Handbook and contains all credit score guidelines for home loan approval.
These credit score requirements are subject to revision based on legislation or program changes, but at the time of this writing, the FICO score requirements for FHA home loans have not changed in some time.
How does the FHA determine the borrower’s credit scores?
“The Minimum Decision Credit Score (MDCS) refers to the credit score reported on the Borrower’s credit report when all reported scores are the same. Where three differing scores are reported, the middle score is the MDCS. Where two differing scores are reported, the MDCS is the lowest score. Where only one score is reported, that score is the MDCS.”
The FHA loan handbook requires an MDCS for all borrowers to be obligated on the mortgage note. In cases where there is more than one loan applicant for the transaction, “the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers.”
In cases where the loan has multiple Borrowers “and one or more of the Borrowers do not have a credit score (non-traditional or insufficient credit)”, the lender will be required to select the lowest score of the borrower or borrowers who DO have credit score(s).
Additional lender requirements may apply.
The FHA Minimum Credit Score Requirement
For maximum financing with a minimum required down payment of 3.5%, FHA loan rules require credit scores of 580 or better. HUD 4000.1 allows FHA loan approval for borrowers with FICO scores between 500 and 579.
But a 10% down payment is required. FICO scores below 500 are not eligible for FHA mortgage loan approval.
Lender standards can, and often are, higher than the 580 minimum for maximum financing. Borrowers with FICO scores at or near 580 will need to discuss lender standards with the loan officer to see what may be required.
FICO Scores Are Not The Only Credit Standard Used To Approve FHA Loans
Don’t miss any payments in the 12 months leading up to the mortgage loan application. This is very important–just as important as FICO scores.
It’s best to give yourself more time to apply for an FHA mortgage if you need to wait a bit in order to have a solid 12 months of on-time payments on all financial obligations.