If you have a low credit score, you might think that getting a loan would be virtually impossible. You may have heard from friends or family members that if your score is low, don’t bother looking for a mortgage loan; you won’t be approved until your score improves…or so they claim.
But this is not the case, as there are multiple options for people with low credit, including low credit FHA loans. These loans have flexible terms and downpayment requirements, making them attractive to a variety of different borrowers.
If you have poor credit but need a mortgage loan to purchase a comfortable, safe home for your family, you deserve to learn more about low credit FHA loans.
Getting a Low Credit FHA Loan
What are FHA Loans?
There are many products available for borrowers, and choosing the right one for your specific situations can seem confusing and complex. But when you understand the details of these loans, you are more likely to make the right decision.
With that in mind, it helps to understand FHA loans and how they work. FHA loans are supported by the Federal Housing Administration, commonly referred to as the “FHA,” which is a part of the Department of Housing and Urban Development. Despite the term, the FHA does not actually loan money for housing purchases. Instead, this organization insures loans that meet their minimum requirements. The bank, lender, or credit union does the lending; the FHA merely supports the loan.
Basically, if an FHA loan goes into default, the FHA financially compensates the lender. For this reasons, lenders are able to provide loans that might otherwise be unavailable.
But the FHA only insures loans that meet their minimum requirements or better, including requirements for downpayments, income, and credit scores. While lenders can have additional requirements if they choose, the FHA sets a minimum level for loans that they will insure.
Credit Requirements for the FHA: A Two-Tiered System
When you apply for an FHA loan, you will have to go through a credit check. Depending on your score, you will be placed into one of two categories, each of which has a different downpayment requirement.
580 or Higher: The “Standard” FHA Loan
- Downpayment Requirement: 3.5%
If you have a strong credit score, one that is at least 580, you can take advantage of FHA loans with a low downpayment. For example, if your score is 620, you will be able to take out a mortgage supported by the FHA and only bring 3.5% as a downpayment. (You can always bring more, but this is the minimum.) So if you are purchasing a house worth $300,000, you will need a downpayment of $10,500.
500 to 579: Low Credit FHA Loans
- Downpayment Requirement: 10%
If you have a low credit score, you can still use an FHA loan. However, you will need to bring at least 10% as a downpayment. If your score is between 500 and 579, you will be subject to the downpayment requirements of 10%, which means $10,000 for every $100,000 of purchase price. So if you want to buy a home valued at $300,000, you will need a downpayment of $30,000. This may seem like a lot, but if you are purchasing a modest home there are ways to save for a 10% downpayment. Despite the larger downpayment requirement, this option allows for the purchase of numerous homes across the country, and makes people eligible for mortgages when their credit score might otherwise keep them from purchasing a home.
While the FHA requires at least some downpayment, it may be possible to use a cash gift to fund the initial costs, including closing fees and other expenses. This can significantly reduce the burden of saving for a downpayment.
Lenders Don’t Have to Stick with the Minimum Requirements Set by the FHA
It’s important to understand that the credit scores and downpayments we discussed above are only the minimum requirements set by the FHA. In many cases, lenders have requirements above these limits, so there can be variety of different application requirements for FHA loans, even though these are not actually the requirements of the FHA.
For example, the FHA requires that borrowers have at least a 500 credit score in order to support the loan. However, the lender can decide that they are uncomfortable offering loans to people with scores this low; they may choose to only offer loans to people with scores as low as 550. Likewise, a lender may have higher downpayment requirements. If they choose, they could decide that borrowers with scores between 580 and 620 need 10% down.
Basically, the lender can increase the requirements if they wish; but they can’t lower the requirements.
The Advantages of a Low Credit FHA Loans
You can choose from a wide variety of different loan options when searching for a mortgage. Conventional loans, for example, are supported by the major organizations of Fannie Mae and Freddie Mac. They are useful to numerous borrowers, but they are not as flexible when it comes to certain details on the loan.
By comparison, an FHA loan has greater flexibility when it comes to credit scores, and many borrowers with low credit will find that while conventional loans are unavailable, FHA loans can help them secure financing. FHA also supports loans for people with lower incomes, increasing the chances of loan approval, and income can come from numerous sources that may not qualify on other loan programs. The loans can also be used to purchase properties that need general repairs, making them a great option for borrowers all across the country!
Let Us Help You Get Approved Today!
If you need an affordable loan that helps you enter homeownership, contact our staff today. If you qualify, we can send your loan to the FastTrack program, which can speed the closing process and result in a faster purchase.
Don’t let a low credit score stop you from owning a home any longer. Let us help you secure a low credit FHA loan so you can enjoy the rewards of homeownership!
