6 Best FHA Loans for Bad Credit

6 Best FHA Loans for Bad Credit
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Brittney Mayer
By: Brittney Mayer
Updated: May 11, 2018
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Despite being the single largest purchase most of us will make, buying a house is far more than a simple investment in real estate — it’s finding a home.

But while home ownership is a dream many of us share, it’s hardly an inexpensive one. And it’s the high cost of buying a home that makes a mortgage necessary for the majority of buyers.

Since many people who could otherwise afford to purchase a home don’t have the credit scores or down payment to qualify for a regular mortgage, the best option is usually a loan insured by the Federal Housing Administration (FHA).

New Mortgages | Refinancing | Qualifications

Top Home Loan Providers for New Mortgages

A common misconception about FHA-backed loans is that the government is the source of the loan, but, on the contrary, the FHA only insures the loan — up to 90% of the LTV (loan-to-value) ratio.

You’ll still need to find an individual lender to obtain a mortgage loan, which generally means a bank or another financial institution. Not every mortgage lender will offer FHA-backed mortgages, so you may need to shop around a little to find the right fit.

Online lending networks, like our picks below, can be an easy way to connect with multiple lenders with a single application, often eliminating the need to go from bank to bank to compare options.

  • Options for: home purchase, refinance, home equity, and reverse mortgage
  • Lenders compete for your business
  • Receive up to 5 offers in minutes, and pick the best offer for you
  • Founded in 1996, LendingTree has facilitated 55 million+ loan requests and $250 billion+ in closed loan transactions
  • Click here for official site, terms, and details.
★★★★★

4.9

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies by Applicant 1996 7 Minutes 9.0/10
  • Options for: home purchase, refinance, cash-out, and debt consolidation
  • The nation's largest online lender
  • Allows applicants to buy a home with a minimal down payment (as little as 3.5% down)
  • In some cases, down payment can be a gift from a relative or nonprofit organization
  • Get pre-approved for free – before you shop for your new home – and get more bargaining power
  • Avoid paying Private Mortgage Insurance with PMI Advantage program
  • Click here for application, terms, and details.
★★★★★

4.7

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies by Applicant 2000 6 Minutes 9.0/10
  • Easy to OwnSM programs give options for those with lower income, limited credit history, and low down payment needs.
  • Provides the potential for minimal out-of-pocket expenses with seller contributions.
  • Offers loans that don't require monthly mortgage insurance.
  • Requires less cash upfront for your down payment and closing costs.
  • Click here for application, terms, and details.
★★★★★

4.5

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies 1852 6 Minutes 8.0/10

+See More Home Loan Providers for Bad Credit

An important thing to note about FHA mortgages is that not every house can be purchased with an FHA-backed loan. The seller has the ability to decide the types of buyer financing they’re willing to work with, and some sellers may prefer buyers with a conventional mortgage (or cash).

Additionally, FHA-backed mortgages can only be obtained up to certain amounts, meaning homes above a certain price will not qualify. The exact FHA loan limits are based on the average housing price in a given location and will generally vary by county.

Top Home Loan Providers for Mortgage Refinancing

If you’re looking to refinance the mortgage on your primary residence, you can use an FHA-backed mortgage to do so, regardless of the nature of your original mortgage.

While not every lender will offer FHA-backed home refinance loans, others may actually specialize in FHA mortgages. Potential borrowers can connect with a variety of lenders through an online lending network like our expert-rated platforms below.

  • Options for: home purchase, refinance, home equity, and reverse mortgage
  • Lenders compete for your business
  • Receive up to 5 offers in minutes, and pick the best offer for you
  • Founded in 1996, LendingTree has facilitated 55 million+ loan requests and $250 billion+ in closed loan transactions
  • Click here for official site, terms, and details.
★★★★★

4.9

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies by Applicant 1996 7 Minutes 9.0/10
  • Options for: refinance only
  • Get 4 free refinance quotes in 30 seconds
  • Network of lenders compete for your loan
  • Trusted by 2 million+ home loan borrowers to date
  • Interest rates are near all-time lows
  • Click here for application, terms, and details.
 
★★★★★

4.7

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies 2004 4 minutes 8.5/10
  • Options for: home purchase, refinance, cash-out, and debt consolidation
  • The nation's largest online lender
  • Allows applicants to buy a home with a minimal down payment (as little as 3.5% down)
  • In some cases, down payment can be a gift from a relative or nonprofit organization
  • Get pre-approved for free – before you shop for your new home – and get more bargaining power
  • Avoid paying Private Mortgage Insurance with PMI Advantage program
  • Click here for application, terms, and details.
★★★★★

4.7

Overall Rating

Interest Rate In Business Since Application Length Reputation Score
Varies by Applicant 2000 6 Minutes 9.0/10

+See More Home Loan Providers for Bad Credit

Before you find a lender, you’ll need to determine which type of refinance loan you should obtain. There are four types of FHA-insured refinance loans, each with its own requirements.

For those who already have an FHA loan, options include an FHA Streamline Refinance loan and an FHA Simple Refinance. Streamline Refinance loans can let you avoid a credit check and appraisal, while Simple Refinance loans can help you avoid out-of-pocket costs.

If your current mortgage is not an FHA-backed loan, you may still qualify for an FHA Cash-Out Refinance loan or an FHA Rehabilitation loan. Cash-Out Refinance loans can provide cash based on your home’s equity. Rehabilitation loans are used to repair or renovate an older home.

How to Qualify for an FHA Loan

Since it’s the FHA that insures FHA-backed loans, the organization has its own specific qualification requirements, including credit, income, and down payment requirements. These qualifications represent the minimum requirements, and individual lenders may set their own standards.

A specific example of this is in the credit requirements. The FHA requires that borrowers have a credit score above 500 to qualify for an FHA-backed loan, and a score of 580 or higher to qualify for the lowest down payment amount. However, many lenders will prefer a credit score above 620.

Beyond the specific score, certain negative credit report items can also impact your ability to qualify for an FHA loan.

In particular, if you have gone through a bankruptcy discharge, you’ll need to wait at least one year after filing Chapter 13, and at least two years after filing Chapter 7 bankruptcy.

Another important qualification for an FHA loan is that your debt-to-income (DTI) percentage needs to be within the acceptable range for the house you wish to purchase. The maximum DTI to qualify for an FHA mortgage is 31%.

To calculate your DTI for a particular home purchase, determine the PITI, then divide by your gross monthly income. For example, if your PITI payment would be $1,000 and your monthly income is $4,000, then your DTI would be $1,000 / $4,000 = 0.25 = 25%.

Example Debt-to-Income Calculation

Your DTI isn’t the only important ratio, however. Your total fixed payment to effective income number also plays a role, with the maximum allowed ratio to qualify set at 43%.

To calculate this ratio, add your current monthly debts to the amount of your potential monthly PITI, then divide by your monthly income. For example, if your current monthly debts equal $500, the monthly PITI is $1,000, and your monthly income is $3,500, the ratio would be: ($1,000 + $500) / $3,500 = 42.8%.

Example Fixed Payment to Effective Income Calculation

Lastly, although FHA loans require a much smaller down payment than most other mortgage loans — a down payment is still required. The minimum down payment to qualify will depend on your credit score.

If your FICO score is 580 or higher, you’ll need a minimum down payment of 3.5% of the purchase price. If your score is lower than 580, you’ll need at least a 10% down payment.

Of course, making a down payment larger than the required minimum can be beneficial in a number of circumstances. Not only can it help you purchase a more expensive home without increasing your ratios, but it can also help you get a lower interest rate in some cases.

Regardless of the size of your down payment, however, you’ll need to pay both upfront and annual mortgage insurance on your FHA-backed loan. The amount will vary based on the size and length of the loan, as well as the size of your down payment.

It May Be Possible to Get a Mortgage with Bad Credit

Owning a home is a dream shared by millions of Americans. But even the smallest homes cost thousands of dollars, making a mortgage a necessary step to home ownership.

FHA-backed mortgages can make the dream a reality for those who can’t afford a big down payment or whose credit scores need a little help.
As handy as FHA loans can be, it’s important to keep in mind that every individual lender can set its own requirements above and beyond the FHA’s prerequisites. You may need to do a little shopping to find the right lender for your particular situation and needs.