Can I Get a Mortgage With a Low Credit Score?
The minimum FICO score requirement for a conventional mortgage is 620, but most approved borrowers have scores significantly higher than this threshold. In fact, the average FICO credit score for an approved conventional purchase mortgage is 752 as of January 2017. If you don't have rock-solid credit, however, that doesn't necessarily mean you can't buy a house. Thanks to FHA mortgages, borrowers with shaky credit could become homeowners and without a massive down payment.
FHA mortgage credit requirements are low
As of this writing, the minimum credit score required for an FHA mortgage with 3.5% down is 580. The down payment can come from a gift or other funding method -- it doesn't necessarily need to be from savings.
Furthermore, if your credit score is less than 580, you could still qualify for an FHA mortgage, but with a higher down payment. In fact, with a 10% down payment, credit scores as low as 500 are allowed. And because the mortgage is insured by the FHA, the interest rate you get will be competitive with the market average, even with a low credit score.
Image source: Getty Images.
It's worth pointing out that you actually have three FICO scores -- one from each of the major credit bureaus (Equifax, Experian, and TransUnion). Lenders will typically use the middle score to determine your ability to qualify for a mortgage. In other words, if you check your three-bureau credit score, and see scores of 582, 595, and 603, the 595 is the one likely to be used for mortgage qualification. So, if you only know one of your FICO scores, it might be a good idea to buy a three-bureau report.
Also, if you're applying with another applicant, such as your spouse, both of your scores will be considered, and the lending decision will be based on the lower of the two.
As of 2017, the FHA maximum loan limits for single-unit homes range from $275,665 to $636,150, depending on where the home is located, and you can find your limits on HUD's website. The loans are available on properties with one to four units, and higher limits are allowed for multi-unit properties. In fact, one popular strategy to lower housing costs involves buying a duplex, triplex, or quad, living in one unit, and renting out the others.
Consider the costs before applying
As with most mortgages that require a down payment of less than 20%, FHA loans require borrowers to pay mortgage insurance. Unlike conventional mortgages, however, FHA mortgage insurance must be paid both upfront and continuously, and it may not be able to be cancelled after the loan's balance is paid down to 80% of the home's value.
Specifically, for loans with a down payment of less than 10% (most FHA loans), the mortgage insurance premium must be paid for the entire term of the loan. For loans with down payments of 10% or more, the mortgage insurance can be cancelled after 11 years.
As I mentioned, there are two components of FHA mortgage insurance. The up-front mortgage insurance premium is currently 1.75% of the base loan amount, regardless of the loan's term or how big your down payment is. For the ongoing mortgage insurance premium, the amount you pay depends on the size of the loan, the length of the loan's tern, and your down payment:
|
Loan Term |
Loan Amount |
Down Payment |
Annual MI Premium |
|---|---|---|---|
|
Over 15 Years |
$636,150 or less |
5% or more |
0.80% |
|
Over 15 Years |
$636,150 or less |
Under 5% |
0.85% |
|
Over 15 Years |
More than $636,150 |
5% or more |
1.00% |
|
Over 15 Years |
More than $636,150 |
Under 5% |
1.05% |
|
15 Years or less |
$636,150 or less |
10% or more |
0.45% |
|
15 Years or less |
$636,150 or less |
Under 10% |
0.70% |
|
15 Years or less |
More than $636,150 |
22% or more |
0.45% |
|
15 Years or less |
More than $636,150 |
10% to 21.99% |
0.70% |
|
15 Years or less |
More than $636,150 |
Under 10% |
0.95% |
Data source: U.S. Department of Housing and Urban Development, accessed through www.fha.com. Premiums expressed as a percentage of the loan's balance each year.
In a nutshell, these mortgage insurance rates are competitive with the private market. However, the additional expense of the up-front premium and the inability for most borrowers to eventually drop their mortgage insurance makes FHA loans significantly more costly than the average low-down payment conventional mortgage.
The bottom line -- who should consider an FHA mortgage?
FHA mortgages make up over 20% of new originations as of this writing, so it's fair to say that they serve a purpose in the U.S. housing market.
Generally, if you can qualify for a conventional mortgage, or maybe even a VA mortgage, it's usually the better option. However, there are several factors that should be considered, such as the interest rate you get offered with each type of loan. For lower-credit borrowers, the FHA mortgage might be the only path to homeownership, and may be a good option to consider if you're tired of paying rent.
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