credit score meter needle between fair and good

How to Qualify for a FHA Loan with a Low Credit Score

Not Bad Credit

Having a low credit score does not necessarily mean that you have bad credit, or are not responsible enough to own a home.  There are many reasons why your credit scores are not higher than they should be.

If you have a good income, no late payments in the past 12 months, and some money in the bank, but your credit scores are not as high as you would like, you may still be eligible for an FHA loan to buy a primary, owner-occupied home.

Most lenders require that you have a minimum 640 credit score before you can qualify to buy a home.  This requirement is not an FHA guideline, it is a restriction placed by the lender, and can be overcome by simply finding a lender that follows FHA guidelines.

Compensating Factors

I want to emphasize that a low credit score does not necessarily mean that you are a high risk to lend money to, and you will be asked to provide extra paperwork and even explanations about why your FICO scores are not higher.

If you have a lower credit score, one below 620, compensating factors, such as low Debt to Income Ratio, and Reserves are required if you are trying to finance a home.

If you have a 620 or higher credit score, and can get an Approve/Eligible decision through your lender’s automated underwriting system (AUS), then you are allowed to buy a home as long as your mortgage payment does not exceed 46.99% of your gross monthly income, and your total monthly payments, including your housing payment, do not exceed 56.99% of your gross monthly income.

This is called your Debt to Income Ratio.  As your credit score goes down, so does your maximum allowed debt-to-income ratio.

Compensating factors are a way for your to make up for not being strong in some areas, as long as your credit profile, assets or circumstances show that you are stable, and responsible in other areas.

Need a Second Opinion? Click Here for Help!

Qualifying for FHA Mortgage Loan with a 580 Credit Score

You can qualify for an FHA loan with a 580 credit score! Here are the circumstances that can allow you to qualify. (Note, there are several different conditions here. If the first one doesn’t apply, keep reading, other options follow.)

If you have a minimum 580 FICO, your debt to income ratio does not exceed 31% for your housing payment, and a total debt ratio of 43%, there are no additional compensating requirements needed.

If you have a minimum 580 FICO, your debt to income ratios do not exceed 37% for your housing payment, and a total debt ratio of 47%, you qualify if you have one of the following compensating factors:

  • 3 months of reserves to cover principal, interest, taxes, and insurance, or
  • Your new total monthly mortgage is not more than $100, or 5% higher than your current housing payment, or
  • If you have residual income showing that you have enough money left over after all of your bills to account for emergencies.

If you have a minimum 580 FICO, your debt to income ratios do not exceed 40% for your housing payment, and a total debt ratio of 40%, you qualify if you have established credit lines in your own name open for at least six months but carries no discretionary debt (i.e., monthly total housing payment is only open installment account and the borrower can document that revolving credit has been paid off in full monthly for at least the previous six months).

If you have a minimum 580 FICO credit score, your debt to income ratio does not exceed 40% for your housing payment, and a total debt ratio of 50%, you qualify if you have Two of the following compensating factors:

  • Verified and documented cash reserves equal to at least three total monthly mortgage payments (1-2 units) or six total monthly mortgage payments (3-4 units).
  • The new total monthly mortgage payment is not more than $100 or 5% higher than the previous total monthly housing payment, whichever is less; and there is a documented twelve-month housing payment history with no more than one 30-day late payment.**
  • Verified and documented significant additional income that is not considered effective income (i.e., part-time or seasonal income verified for more than one year but less than two years).
  • Residual Income shows that you have enough money left over after all of your bills to account for emergencies.

** In cash-out transactions all payments on the mortgage being refinanced must have been made within the month due for the previous 12 months.

Don’t Take No For An Answer

As you can see, FHA allows for more flexibility than many lenders are willing to extend to borrowers that do not fit into their idea of an ideal homebuyer, or homeowner.

If you have a good explanation (maxed out credit cards, but no late payments is a very common reason for low credit scores), or compensating factors, and otherwise have lower credit scores than you would like, you simply need to find a lender that is willing to put in the effort to help you understand what steps you need to take to qualify to purchase or refinance your home.

Have Mortgage Questions? We Can Help! Click Here

Mortgage With A 580 Credit Score

If you have a credit score of 580 or higher and can meet certain other conditions, it’s probable that we can help you get a mortgage so you can buy a house. Some loan officers aren’t willing to do the work to help you qualify, that’s not us. 

Let’s talk. While we can’t guarantee a “yes” answer, we can guarantee that we know the rules and are willing to do the work to help you get a mortgage if you qualify.

Get a second opinion from an FHA specialist HERE.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

Do You Have Questions About Qualifying?

Find a Mortgage Expert Near You

Find a Mortgage Expert by State

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawai'i

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

New Mexico

New York

North Carolina

North Dakota

South Dakota

Tenessee

Texas

Utah

Vermont

Virginia

Washington

Washington DC

West Virginia

Wisconsin

Wyoming