September 11, 2012
A reader asks, “What is the lowest starting credit score?”
This is a difficult question for some borrowers because the answer isn’t as straightforward as quoting the FHA loan rules. Individual lenders don’t have to require a standard identical to the minimum–they are free to require higher scores.
For example, in a 2010 press release titled, “FHA Announces Policy Changes to Address Risk and Strengthen Finances ” the FHA and HUD announced a change for minimum FICO scores required in order to be approved for an FHA guaranteed home loan. The press release stated FHA and HUD planned to:
“Update the combination of FICO scores and down payments for new borrowers.
- New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
- This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
- This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.”
A FICO score of 580 is not acceptable to many lenders–a typical FHA loan applicant will find banks willing to approve FHA mortgages with a minimum FICO score of 620, often higher. The FHA cannot force a lender to issue credit to a borrower with a FICO score of 580–it can only require the borrower have a score NO LOWER than 580.
So the basic answer to the reader question is that it depends greatly on the lender’s standards. Borrowers with credit scores below 620 should contact the FHA for a referral to an FHA approved credit counselor who can help the borrower learn what to do in order to increase credit scores. It is NOT advised that borrowers pay “credit repair” agencies who offer to help “fix your credit” for a fee.
Borrowers should concentrate on fixing their own credit by establishing a record of on-time bill payments for all financial obligations for a year or more, eliminating unnecessary lines of credit and reducing their debt-to-income ratio. For help finding a reputable credit counselor or pre-purchase housing counselor, contact the FHA at 1-800-CALL FHA.
Do you have questions about the FHA home loan process? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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