Can People With Bad Credit Get an FHA Loan in 2014?

It's one of the most common questions we get from our readers: Can I get an FHA loan with a bad credit score? Can I qualify for FHA financing with a score of 500 ... or 550, or 600, etc.? Instead of answering these questions one by one, as in the past, we've created this combined Q&A tutorial to answer these and similar questions.

In a nutshell: In a hurry? Here's the article in 100 words or less. People with bad credit may find it hard to qualify for an FHA loan these days. The Department of Housing and Urban Development introduced new score requirements after the housing crisis. Additionally, mortgage lenders today are requiring higher scores than they did during the boom years. With that being said, we are starting to see some "easing" in this area. While many lenders still shy away from bad credit FHA loans, some are offering financing to borrowers with scores down into the 500 range (something that was unheard of just a few years ago).

Standard Credit Qualifications for FHA Loans in 2014

HUD Handbook 4155.1 explains the minimum credit qualifications for this program. It also explains how lenders should handle borrowers with bad credit who are seeking an FHA-insured mortgage loan. You can find this handbook online with a quick Google search.

Here are some of the highlights...

Lenders are required to obtain one credit report for each borrower.
In most cases, the lender must use the merged credit report from all three bureaus (Experian, TransUnion and Equifax). This is known as a tri-merged credit report, or TRMCR.
The lender must review these report for late payments, foreclosures, bankruptcies, tax liens and legal judgments, as these issues might prevent the borrower from qualifying for an FHA loan.
When reviewing the borrower's history, underwriters are encouraged to consider "the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments." (Translation: A single derogatory item on your report might not necessarily disqualify you. Exceptions can be made.)
The lender must analyze any late payment and/or delinquent accounts, and document this analysis. They must determine if they were the result of (A) a disregard for financial obligations, (B) an inability to manage debt, or (B) factors beyond the borrower's control.
Your credit score is another important part of the FHA review process. To qualify for the program, you must have a score of at least 500. This is the official minimum. Lenders may require an even higher score when considering you for a loan. You must have a score of 580 or higher to use the 3.5% down payment option (which is the primary benefit of the program).
According to official HUD guidelines: "Borrowers with a minimum decision credit score of less than 500 are not eligible for FHA-insured mortgage financing."

This is just a quick overview. To learn more about these and other criteria for FHA loans in 2014, check out HUD handbook 4155.1, particularly Chapter 4, Section 'C.'

Lenders Can Label You "Bad Credit" Even When You Meet FHA Standards

Here's something that may surprise you. Mortgage lenders could view you as a bad-credit borrower even if you're above the official score cutoff of 500. That may seem like a paradox, but it's not. Here's why.

When you take a close look at how the FHA loan program works, you can see there are really two sets of guidelines you must meet. The Department of Housing and Urban Development has established a minimum credit score for this program. The current minimum, for 2014, is 500. But the lender can impose a higher standard on top of this. In industry jargon, this is referred to as an "overlay." So a borrower who falls within HUD's guidelines could be applying for a bad credit FHA loan without even realizing.

Here are the official guidelines once again: Borrowers with scores between 500 and 579 can qualify for 90% financing, which means they must make a down payment of at least 10% of the purchase price. Borrowers with scores of 580 or higher can qualify for the maximum financing amount of 96.5%, for a minimum down payment of only 3.5%.

But this is where the lender's overlay could affect bad-credit FHA borrowers. In 2014, borrowers with scores in the low-500 range could have a hard time qualifying for the program. From a mortgage lender's perspective, a borrower with a score of, say, 500 or 510 would likely be considered a high-risk borrower. After all, these numbers don't drop on their own. It usually happens as a result of some kind of negligence on the consumer's part -- late payments, missed payments, debt collections, foreclosures, etc.

So what are lenders looking for in 2014? Based on everything I've read and heard over the last few months, it seems that most of them are setting the bar at a credit score of 600 or higher. Anything below that could be considered a bad credit FHA loan, and those are harder to come by in 2014.

The bottom line: Meeting HUD's minimum requirements is not enough. You must also measure up to the mortgage lender's guidelines, and these are typically stricter.

Related Questions from Our Readers

We receive a lot of questions about FHA loans for people with bad credit. Here are some select Q&A sessions that will give you a better understanding of how the program works, and what it takes to qualify:

Can I get an FHA loan with a bad credit score (mid 500) in 2014?

Reader question: "I checked my credit scores recently and found that the average for all three is around 550. I'm planning to buy a house soon. My brother told me I should look into the FHA mortgage program, since my FICO numbers are less than ideal. So I have two questions. (1) Is my score considered low by current lending standards? (2) Is it possible to get an FHA loan with a bad credit score in 2014? I'm just wondering if it's even worth trying."

Short answer: Yes, it's worth trying. You're above the official cutoff point for this program. But you might run into some obstacles with the mortgage lender, depending on which one you choose. The good news is that we are seeing signs of easing across the industry, where FHA credit scores are concerned.

A FICO score of 550 is considered below average in 2014. So it may create problems for you when you apply for financing. The Department of Housing and Urban Development (HUD) creates all of the guidelines for this program. You can find these in HUD Handbook 4155.1. Just Google the full name of the handbook and you'll find it on HUD.gov.

So back to your question: Can you get an FHA loan with a bad credit score in the 550 range? HUD's current guidelines require borrowers to have a "decision" score of 500 or higher for basic program eligibility. To take advantage of the low 3.5% down payment, borrowers will need a score of 580 or higher. Very few exceptions are made to these minimum criteria.

When you apply for an FHA loan, you must do it through a mortgage lender. You don't apply through HUD because they are not the ones actually making the loan. Lenders can set their score cutoffs wherever they want. Most require a 600 or above for approval, regardless of the type of mortgage you are using. So you might not be able to get an FHA loan with a bad credit score in 2014.

But don't take this as gospel. Get out there and talk to some lenders. See if there's anything they can do to help you. It couldn't hurt. You might also want to talk to a HUD-approved housing counselor. They can offer advice on how best to boost your score, so you can get approved for FHA financing down the road. Check the HUD website for a list of counselors in your area.

Disclaimers: This website is provided for educational purposes and should not be viewed as financial advice. We are mortgage researchers and consumer advocates -- not lenders. We are not affiliated with the Federal Housing Administration or its "parent" organization the Department of Housing and Urban Development. Bad credit FHA loans are a popular topic among home buyers today, so we have done our best to address this topic. Every lending scenario is different because every borrower is different. The only way to find out if you're qualified for FHA mortgage financing is to apply for a loan.