How Borrowers with Low Credit Scores Can Qualify for FHA Loans in 2024

David Cohn
Apr 16, 2024
FHA loans

Low credit score borrowers may be eligible for FHA loans thanks to a 2017 FHA policy update that encouraged lenders to loosen credit score requirements. This update continues to make homeownership a possibility for lower-credit-score borrowers in 2024. 

Let's discuss everything you need to know if you have a low credit score and how to qualify for an FHA loan.

What minimum credit score do you need to be eligible for an FHA loan?

The credit score you need for an FHA loan in 2024 varies based on your down payment. A score of580 qualifies you for a 3.5% down payment, while a score of 500 requires a 10%down payment. 

The FHA provides these minimums, but lenders may require higher credit scores due to their risk assessments.

Some lenders might set their minimum credit score requirements between 620 to640.It's also essential to remember that a lower credit score can lead to higher interest rates.

Do FHA loans require lower credit scores in general?

Yes. Below is a quick overview of minimum credit scores needed for various types of loans

  • FHA Loan: 580     with a 3.5% down payment; 500 with 10% down.
  • VA Loan: No     official minimum, but most lenders prefer 620 or higher.
  • USDA Loan:     Lenders typically require a minimum score of 640.
  • Conventional Loan: A score of 620 to640 is usually required.

While conventional loans have their merits, they lack the flexibility of FHA loans when it comes to accommodating borrowers with medium to low credit scores, varied income sources, or those needing financial assistance for down payments. 

Federal Housing Administration loans offer an alternative to individuals who might otherwise be unable to secure financing for homeownership. These loans help in several ways:

  • Compared to conventional loans that typically require 20% down, FHA loans allow you to put down as little as 3.5%, making homeownership more accessible.
  • Need help with the down payment? FHA allows you to use gift funds from relatives or friends, easing the financial burden.
  • Are you looking to renovate? FHA loans can finance homes that need repairs, letting you purchase a property and fix it according to your taste and budget.

 This inclusive approach has helped millions transition from renting to owning. It suggests that FHA could broaden its support even further, making homeownership accessible to an even greater portion of the American populace.


Do FHA lenders always follow FHA credit score minimums? 

No. Interestingly, not all lenders adhere strictly to the FHA's minimum credit score guidelines. Since these institutions operate on a profit basis, they consider the borrower's overall financial stability and additional factors such as income and debt-to-income ratio instead of just the credit score.

The FHA sets minimum credit score requirements for borrowers, but some lenders might ask for even higher scores. The FHA can penalize lenders who approve too many loans that default.

Since lower credit scores are statistically linked to a higher risk of default, lenders may be cautious and set stricter credit score minimums.

For example, many lenders might require a score of 620 to 640, even though the FHA sometimes allows for lower scores. All that said, a 2017 policy update aimed to narrow this gap between FHA standards and lender requirements. Let's talk about this in the next section. 


What FHA policy update makes it easier for low-credit borrowers to qualify?

 Before2017, the FHA judged lenders based on how their borrowers' on-time payments compared to other lenders in the same area. 

The FHA essentially compared the percentage of late payments on FHA loans for each lender to the average late payment rate of other FHA lenders in their geographic location.

This meant a lender could be penalized (lose their ability to offer FHA loans) if their borrowers were late more often than borrowers from stricter lenders nearby. The policy was criticized for being unfair because some are as naturally had higher rates of late payments.

Many lenders raised their minimum credit score requirement to avoid being penalized, which went against the FHA's goal of helping people with lower credit scores buy homes. The 2017 update changed how the FHA evaluates lenders.

Now, they look at late payment rates in three separate credit score groups (below 640,640-680, and above 680) on a national level. This allows for a fairer comparison because it considers the higher risk associated with lower credit scores. 

This update also helps lenders feel more comfortable offering FHA loans to borrowers with broader credit scores.  

Estimates suggest it could enable an additional 100,000 families each year to achieve homeownership through an FHA loan, building on the FHA's long history of helping millions of families become homeowners.


How does the new FHA policy help borrowers with lower credit scores?

The updated policy mitigates the risk for lenders serving clients with lower credit scores, enabling them to maintain or even lower their minimum credit score requirements without fear of penalty. This approach aligns with the FHA's goal of increasing homeownership among underserved communities. 

For example, a lender primarily serving borrowers with credit scores below 640won't be mistreated compared to one serving a higher-credit clientele.

This level playing field encourages lenders to continue supporting potential home buyers who might otherwise be excluded from the market due to stringent credit requirements.


When can borrowers with lower credit scores apply for an FHA loan?

 Since implementing these policy changes in 2017, many lenders may have already adjusted their guidelines to accommodate borrowers with lower credit scores. The lending industry often experiences a "step-down effect," 

Where one lender's loosening of credit requirements can lead to widespread easing among competitors, when a bank makes it easier to get a loan, other banks often do the same thing to stay competitive. 

This ripple effect can gradually expand the accessibility of FHA loans to more individuals and provide those with less-than-ideal credit scores the opportunity to pursue homeownership.  

Borrowers interested in taking advantage of this more inclusive lending landscape should consult FHA-approved lenders to understand the current credit requirements and application process.

Capital Investors Direct can help if you want an FHA multifamily loan to buy a commercial property, such as a multifamily residential unit. Contact us at 800.348.8120.