If you’re starting out on the home buying journey, you might have heard of FHA loans, but what does “FHA” stand for and why should you consider this type of loan? A Federal Housing Administration (FHA) loan might be a good option if you have debt or a lower credit score. You might even be able to get an FHA loan with a bankruptcy or other financial issue on your record.
Let’s take a closer look at FHA home loans, their requirements and whether an FHA loan might be right for you.
Can I Get an FHA Loan with a Credit Score of 620? Your Guide to Homeownership
If your dream is to own your own home but you’re worried about your credit score, an FHA loan may be the perfect solution. FHA loans are government-backed mortgages that provide more flexible lending options, making homeownership achievable even if your credit score is not perfect.
In this comprehensive guide, we will dive into everything you need to know about getting an FHA loan with a credit score of 620. We’ll cover what an FHA loan is FHA credit score requirements how to get approved, reasons for denial, and more. Read on to learn how you could turn your dream of homeownership into a reality with an FHA loan!
What is an FHA Loan?
An FHA loan is a mortgage insured by the Federal Housing Administration an agency within the Department of Housing and Urban Development. Because the FHA insures these loans, it enables lenders to offer more flexible terms to borrowers who may not qualify for conventional mortgages.
Some key features of FHA loans include:
- Lower down payments – Only 3.5% down payment required
- Lower credit score requirements – Minimum score is 580
- Loans for single family homes as well as multifamily properties
- Can be used for purchasing a new home or refinancing an existing mortgage
FHA Credit Score Requirements
The minimum credit score to qualify for an FHA loan is 580. If your score is between 500-579, you can still potentially get approved but will need a higher down payment of 10%.
However, many lenders require higher scores of 620 or 640 despite the FHA minimum being 580. This is because lenders can set their own borrowing criteria beyond FHA’s requirements.
If your credit score is 620, you meet the minimum for an FHA loan approval with most lenders. But getting approved involves more than just your credit score.
How to Get Approved for an FHA Loan with a 620 Credit Score
When applying for an FHA loan, the lender will evaluate these key factors:
- Credit Score – The main factor, with 620 meeting minimums
- Income – Must have steady employment and income
- Debt-to-Income Ratio – Must not exceed 43%
- Down Payment – Minimum 3.5%
- Loan Amount – Cannot exceed FHA mortgage limits
- Home Appraisal – House must appraise for purchase price
As long as you meet these requirements, have limited issues on your credit report, and have positive compensating factors like solid income and assets, you should have a good chance of getting approved.
Work on improving your credit score and debt-to-income ratio in advance if they are near the cutoffs. Save up for a down payment and closing costs. Also consider talking to a mortgage broker who can guide you through the process.
Reasons for FHA Loan Denial with a 620 Credit Score
While a 620 credit score meets the minimum, getting denied is still possible if there are certain negatives on your credit report or application. Reasons an FHA loan may be denied include:
- Recent missed mortgage or rent payments
- High debt-to-income ratio exceeding 43%
- Limited income or employment history
- Large amounts of outstanding collections
- Previous foreclosure or bankruptcy within last few years
Each situation is different. If you have risk factors like these impacting your application, an experienced mortgage broker can advise if you may need to improve your financial profile first before attempting to get approved.
Alternatives to Explore if Denied an FHA Loan
If your credit score or profile needs more work before attempting an FHA loan, here are some options to consider in the meantime:
- Improve your credit – Increase your score and address any issues to strengthen your profile
- Save for a larger down payment – At least 10% down can help offset credit weaknesses
- Add a co-signer – Applying with a co-signer with stronger credit can boost your chances
- Explore alternative government loans – VA and USDA programs may have different requirements
- Shop lenders – Each lender has some discretion over FHA borrowing criteria
Don’t get discouraged if your first FHA loan application is denied. With some time and financial improvements, your situation can change. An experienced loan officer can help assess your options and put you in the best position to get approved.
The Bottom Line
The bottom line is that getting an FHA loan with a 620 credit score is possible with the right lender. While your credit score meets the minimum requirements, focus on having additional positive factors in your application – solid income, low debt, and adequate assets. Mitigate any risk factors ahead of time. And work with a knowledgeable loan officer to guide you through the mortgage process.
Owning your own home is an achievable dream, even with less-than-perfect credit. With flexible FHA loan options, you can take the first steps towards turning your dream into a reality.
FHA home loan DTI
If you have a higher credit score, you might qualify with a higher debt-to-income ratio, or DTI. DTI is your total monthly debt payments divided by your monthly gross income (your monthly income before taxes). This figure is expressed as a percentage.
To determine your DTI, divide your debts by your monthly gross income. For example, if your debts – which include your student loans and car loan – reach $2,000 per month and your income is $8,000 per month, your DTI is 25%.
The lower your DTI, the better off you’ll be. If you have a higher DTI, you could still qualify for an FHA loan if you have a higher credit score.
The FHA says your monthly mortgage payment should be no more than 31% of your monthly gross income. Meanwhile, your DTI should not exceed 43% of monthly gross income in certain circumstances if your loan is being manually underwritten. As noted above, you may qualify with a higher DTI if you have a higher credit score.
Your eligibility for an FHA loan doesn’t hinge on a particular income amount, but you must prove you have a steady employment history. Your income must be verifiable by sharing pay stubs, W-2s, federal tax returns and bank statements with your lender. Your lender may ask for other examples of verification as well.
FHA loan down payments
Your down payment is a percentage of the purchase price of a home and is the amount you put down for that home. The minimum down payment you’re required to make on an FHA loan is directly linked to your credit score. Your credit score is a number ranging from 300 – 850 that’s used to indicate your creditworthiness.
An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range. Rocket Mortgage® requires a minimum credit score of 580 for FHA loans. A mortgage calculator can help you estimate your monthly payments, and you can also see how your down payment amount affects them.
Note that cash down payments can be made with gift assistance for an FHA loan, but they must be well-documented to ensure the assistance is truly a gift and not a loan in disguise.
You’ll pay a mortgage insurance premium (MIP) for all FHA loans – similar to private mortgage insurance (PMI) for a conventional loan. Mortgage insurance protects your lender against losses if you default on your loan.
In most cases, you pay mortgage insurance for the life of an FHA loan. The exception is if you made a down payment of at least 10% – in that case, MIP would be on the loan for the first 11 years). FHA loan mortgage insurance is first charged as an upfront mortgage insurance premium, which normally amounts to 1.75% of your loan amount.
FHA borrowers also pay an annual mortgage insurance premium, which is based on the term (length) of your mortgage, your loan-to-value (LTV) ratio, your total mortgage amount and the size of your down payment. Annual MIP payments run approximately 0.15% – 0.75% of the loan amount.
Mortgage with 600 – 620 credit score – Get Approved!
FAQ
Can I get an FHA loan with a 620 credit score?
To qualify for an FHA-insured loan, you need a minimum credit score of 580 for a loan with a 3.5% down payment, and a minimum score of 500 with 10% down. However, many FHA lenders require credit scores of at least 620.
How much do I need to make to buy a $300K house with an FHA loan?
To buy a $300K house, you’ll generally need to earn a household income around $80,000 per year, assuming 20% down, a 6.5% interest rate, and moderate existing debts.
What is the lowest credit score FHA will accept?
FHA credit score: You can qualify for an FHA loan with a credit score of at least 580 if you can make a 3.5 percent down payment. If you have a score of at least 500, you’ll need a 10 percent down payment. Individual lenders may require higher scores.
How much of a loan can I get with a 620 credit score?