Reader question: “I just checked my credit scores across all three of the reporting bureaus, because I am planning to buy a house with an FHA loan this year. My Experian score was 580, my TransUnion number was closer to 600, and the Equifax number was roughly in the middle. So I have a two-part question. Can I get an FHA loan with a credit score between 580 and 600? And secondly, do mortgage lenders use the lowest score, or the middle one, when qualifying borrowers?”
As far as credit scores go, you meet the official guidelines for an FHA loan. HUD Handbook 4155.1, Chapter 4, Section ‘A’ states that borrowers must have a “minimum decision credit score” of 500 or higher to be eligible for an FHA loan. It further states that borrowers must have a score of 580 or higher to be eligible for maximum financing of 96.5% (with a down payment of 3.5%).
But that doesn’t necessarily mean the lender will approve you for an FHA-insured home loan. They have their own standards for approving borrowers, as explained below.
FHA Loan with a 580 Credit Score? Officially, Yes.
Can you get an FHA loan with a credit score of 580 to 600? Officially, yes. In reality? Maybe. You still have to pass muster with the mortgage lender, and the lender may have higher credit-score standards than HUD.
Here’s the reality of the situation. The lender might not qualify you for an FHA loan with a 580 or 590 credit score, even though you meet the official minimum guidelines. In mortgage industry jargon, this is known as an overlay.
Definition: An overlay is when the mortgage company or bank imposes higher standards on top of those required by the underlying institution (in this case, the Department of Housing and Urban Development). There are lender overlays for appraisal requirements, documentation requirements, debt-to-income ratios, length of employment, and borrower credit scores.
With a credit score between 580 and 600, you meet the official guidelines for an FHA loan. Whether you meet the lender’s minimum guidelines for approval is a different story. You won’t know until you either apply for a loan, or contact them regarding their criteria. And keep in mind different mortgage companies have different standards and “appetites” for risk. So it’s important to shop around.
Which Score Do Lenders Use? Middle or Lowest?
So we’ve answered your first question. Can you get an FHA-insured mortgage with a 580+ credit score? Technically, yes. Officially, yes. But only if the lender allows it. Let’s move on to address your second question. Which of the three credit scores do lenders use when approving borrowers? The middle one, or the lowest one?
For conventional loans, this can vary from one lender to the next based on their internal procedures and protocols. But with FHA loans, we actually have some clear guidelines on the subject. Here’s what HUD Handbook 4155.1 says about the minimum “decision credit score.”
- Three: If the lender obtains all three of your bureau scores (from Equifax, TransUnion and Experian, the three companies that sell them), the lender must use the middle number to determine your eligibility.
- Two: If there are two scores to consider, the lower number must be used for eligibility purposes.
- One: Obviously, if there is only one score, that’s the one the lender will use when considering you for a loan.
You said your Equifax score was somewhere in the middle, between 580 and 600. In that case, they will probably use your Equifax score to determine eligibility for the FHA loan program.
More Than One Borrower
It’s common for a mortgage loan to have more than one borrower. Spouses are the most common example of this. Two spouses can combine their income to qualify for a larger amount than they could qualify for on their own. But in such cases, both credit scores must be considered as well. HUD has some specific guidelines for multiple-borrower scenarios with FHA loans.
When there is more than one borrower, the lender is required to determine the decision credit scores for both borrowers (using the three-two-one guidelines explained above). Then they must use the lower of the two borrowers’ scores.
Disclaimer: This article answers the question, Can I qualify for an FHA loan with a credit score of 580 to 600? This article references information from the official handbook that covers borrower eligibility. HUD frequently makes changes to their handbooks and guidelines, and these changes are announced in the form of “mortgagee letters.” Due to the ever-changing nature of the FHA program, there is a chance that portions of this article will become outdated over time. For the latest information, guidelines and standards, we refer you to HUD Handbook 4155.1, entitled “Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans.” You can find this handbook online with a Google search. You might wish to visit our niche website, FHAhandbook.com, as well.