Credit Score Needed for Home Loan — 2016 Changes

Credit Score Needed for Home Loan — 2016 Changes
Mike Randall
By: Mike Randall
Posted: December 18, 2015's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

If you’re considering buying a home in 2016, recently announced changes to the Federal Housing Administration’s minimum credit score requirements could make it easier for potential homebuyers to qualify for an FHA loan.

580 Now Qualifies You for the Lowest Down Payment

Since 1934 the FHA has been helping families with less-than-perfect credit and lower incomes to obtain a loan for the house of their dreams.

Under the newly announced policy, a potential FHA borrower would need to have a FICO credit score of only 580 to qualify for the lowest down payment plan of just 3.5 percent. Borrowers with lower scores can still qualify for a loan, although they will be required to put a 10-percent down payment on their loan.

When it comes to qualifying for one of the largest purchases you’ll make in life, your credit score still matters a great deal in order to obtain the lowest interest rates. If your score is preventing you from obtaining an FHA loan, there are things you can do to help bring your score up.

If You Still Don’t Meet the Requirements — Credit Repair Can Help

A reputable credit repair service can often help borrowers who have attempted to get an FHA loan and have been denied. They can also help to raise your score to a level that entitles you to the low down payment advantage plan. Below are three of our top-recommended credit repair companies:

Credit Repair Services & Reviews


A credit repair company can also help you devise a plan to see both immediate and long-term credit score increases.

Changes to the FHA Policy Affect Credit Score Comparisons

Under the previous FHA policy, lenders would frequently refuse to lend to potential borrowers who had credit scores at the low end of the allowable range. That’s because the FHA had the ability to strip lenders of their FHA lending rights if there were many defaults by their borrowers. This caused lenders to increase the minimum credit score requirement beyond what the FHA officially stated. This, however, is beginning to change.

Lenders Now Have Increased Incentive to Provide Loans to You

Previously the FHA compared the ratio of loan defaults among lenders in the same geographical area and penalized those lenders who had above-average default rates. The actual credit score range of the borrowers was never taken into account when determining those lenders with higher default rates. As a result, lenders who made loans to borrowers at the low end of the FHA’s credit range would invariably incur more defaults.

Under the new policy, the FHA will look at defaults among lenders whose borrowers fall into a range of credit scores. For example, a lender who makes a loan to someone with a 580 credit score will only have their default rate compared with other lenders who have borrowers in the 580 to 640 range. In addition, the comparison is now done nationally rather than regionally. This will provide more incentive for lenders to provide loans all the way down the credit score ladder.

75,000 – 100,000 New FHA Loans Estimated for 2016

Since lenders have a right to make loans based upon their own guidelines and criteria, the FHA can only influence the decision with this policy change. It will likely take some time for these new rules to trickle down to individual lending institutions. However, as more lenders see positive results – meaning more loans and fewer penalties – they will undoubtedly begin making what were previously considered riskier loans.

It is estimated that as many as 75,000 to 100,000 new FHA loans could be issued in 2016 to borrowers that were previously locked out of the market. This is great news for a large number of families who are right on the edge of qualifying for an FHA loan.