What Is The Minimum Credit Score for an FHA Loan?

June 27th, 2011 | Author:

Contrary to what was normally believed, there has always been no minimum credit score for an FHA loan. That was the case until the recent news that sent a shock among mortgage loan borrowers. On July 16, 2010, the Federal Housing Administration declared the new rule amidst the changing economic situation in the United States. This rule stipulated that 500 should be the minimum credit score for an FHA loan.

The FHA, which is operated by the Department of Housing and Urban Development, initiated this move in spite of the recovering economy after the near collapse of the United States economy in the late 2000s. The FHA has never required any minimum credit score for an FHA loan before.

Although announced midyear, the move had been initiated during the second quarter of 2010. Surprisingly enough, the majority of the loans of that period were given to borrowers with credit scores of at least 620. Furthermore, borrowers with credit scores below 580 only make up less than 1 percent of the approved borrowers of that period.

The move was enacted to reduce the risks related to loan doling without any FHA loan credit score requirements. The move was also meant to strengthen the financial reserves that insure those loans. This has been a critical step for the government in strengthening its drive to recover from the housing crisis of recent years.

For years, the Department of Housing and Urban Development has shown increasing concern regarding the number of borrowers that have refused to pay for housing loans and mortgages. While the defaults have increased in number, so have the rates of generally all mortgage loans.

Since the mid 2000s, the number of delinquent loan mortgage payments has increased to up to almost 94%. The lowest of which was almost 91% during the month of January 2009.

These defaults have almost used up all of the reserve money managed by the FHA. This reserve is funded by payments of insurance premiums. With the worsening situation of the housing loan payments, the government realized that there was more need to control defaults.

Knowing the gravity of the situation, the FHA planned to require FHA loan credit score requirements. The first proposed idea was to require a 10 percent down payment for borrowers with at most a 580 credit score.

The second proposal was to decrease the concessions of home sellers to less than 3 percent of the selling price. This would motivate the buyers to work harder for their home.

Before these proposals are put into fruition, the FHA has imposed that 500 should be the minimum credit score for an FHA loan. Although this might seem unfair for borrowers that never had the chance to borrow from the FHA when there was still no minimum credit score for an FHA loan, the new rule is still put into place to protect all borrowers nonetheless.

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