FHA Loan Requirements For 2023

FHA Mortgage Credit Score Requirements 2022

If you’re like a lot of people, the last two years have been rough. With the pandemic’s start, people were laid off, and bills got behind. Even with the best of intentions, people’s credit scores took a hit. Now that you may have gotten back on your feet, you may be in the market for a new home. FHA, the Federal Housing Administration, is a popular choice for borrowers, and it’s for good reason. 

How does the FHA Determine Your Credit Score?

The FHA will look at your credit score. 

There are three main credit bureaus. Equifax, TransUnion, and Equifax. There are others, such as VantageScore. The Credit Bureau used most often is Fico, which determines a person’s credit score from the three main bureaus. If your scores are different, they will use the median score, and if there are two, the lender will take the lower of the two. Lenders use your credit score to determine how much your interest rate will be. 

What Determines Your Credit Score?

Numerous factors determine your credit score. Credit scores range from 300-850, with the higher number being better. Knowing your score can help you keep or maintain a good credit rating if it’s something you can control. Your payment history is a very large factor. If you have delinquent or non-payment issues showing up, this is a red flag for lenders.

The total amount of debt you owe is another factor. What types of credit and how long you have had the credit will also factor in. Credit utilization is another significant factor. This is the percentage of your credit currently being used. For example, if you have a credit line of $10,000, what percentage of that is used vs. available to you?  

Here is what each credit score is considered:

• Excellent: 800–850
• Very Good: 740–799
• Good: 670–739
• Fair: 580–669
• Poor: 300–579

FHA Minimum Credit Score Requirement

You can be approved for an FHA loan with a credit score as low as 500; however, there will be negatives included because of this. Lenders consider this a subprime loan if you have a low credit score. If your credit score is as low as 500, you will need a higher downpayment, typically 10%. To qualify with a credit score below 580, you will need some compensating factors and higher ratios to offset that low score. The ratios are your housing expense and debt to income (DTI).

What Is a Housing Expense Ratio?

A Housing Expense Ratio is the percent of your gross monthly income used for your housing expenses. It can’t exceed 31% of your gross income. 

What is your Debt to Income Ratio?

Your Debt to Income ratio includes all your monthly debt, including your credit card payments, student loans, auto loans, mortgage payments, etc. If you are applying with a low credit score of 580 or less, your DTI can’t go over 45% of your gross income. 

Higher Credit Scores Pay Off

If you have a credit score of higher than 580, your down payment will only need to be 3.5%. This higher score helps you open up a much larger house market. Lenders will be more willing to work with you, and you will be able to find one that offers a better loan package with lower interest rates. 

FHA Loans with No Credit History

You are able to get an FHA loan with no credit history, but it is more complicated. FHA, and all lenders, want to see that you have a few open accounts that are reporting on your credit, such as credit cards and monthly loans. You will need to have a co-borrower with a credit of 640 or higher.

You can have no credit history, but the other person must. These loan types will be manually underwritten, which means that a professional underwriter will go through your finances and determine your eligibility for the loan. This means it will take more time. With a no-credit history application, you will need to have non-traditional credit references. This can include telephone service, rental housing payments, or utilities.

Two of the references can consist of these: an insurance premium (not auto deducted), childcare payments, school tuition, a car lease, retail credit cards, and a 12-month history of your savings, which resulted in an increased balance to the account. These deposits can’t be payroll deducted, and there can be no insufficient funds charges. If you have no credit history, you will also need to have a low DTI ratio. 

What Can You Do If You Don’t Qualify for An FHA Loan Due to Credit Requirements? 

Even though the FHA assists people with lower credit scores, you might still not qualify, which is disappointing. In order to qualify, you can try to raise your credit score. This does take time, but credit scores can vary from day to day. You need to ensure payments are on time, look at your credit utilization, and be active in repairing your credit.

Another option is to put down a larger down payment. The more money you have to put down, the greater the chance of approval with a lower credit score. You could also enlist the help of a co-borrower who may have a better credit score. You can also decide to lower the amount you want to borrow by looking at a home in a different price range.

The less the home costs, the less you will have to borrow, and the down payment will be less. Lastly, are there any compensating factors that will help you? Do you have ample money reserves? Is there additional income you can count? It helps to discuss these options with your mortgage broker. 

FHA Loan Limits

The FHA has varied loan limits, which are determined by where you want to buy a house. This can vary by county. An FHA loan limit is the maximum amount of money that you can take out for an FHA Loan. The maximum for 2022 is $420, 680 for a single-family home; however, this can vary if you live in a high-cost area. The highest FHA loan limit is set at $970,800 for high-cost areas in the United States. These loan limits are updated annually.  

Different FHA Lenders will have varied requirements. It would be best if you found a lender that will work with you with a low credit score. There are options available for you!