FHA Loans for Bad Credit Scores

Get an FHA Loan to Buy or Refinance a Home

The FHA loan program can help you buy or refinance a house even if you have a bad credit score. FHA home loans are backed by the Federal Housing Administration, which allows lenders like Freedom Mortgage to offer loans to customers who may have lower credit scores.

What Is the Lowest Credit Score for FHA Loans?

At Freedom Mortgage, our minimum FHA loan credit scores depend on whether you want to buy a home or refinance a home.

• We can often accept a minimum credit score as low as 550 when you want to buy a home with an FHA loan.
• We can often accept a minimum credit score as low as 550 when you want to refinance and get cash from your home's equity with an FHA loan.
• We can often offer an easy credit score qualification when you want to refinance a house with an FHA loan.

If you have a lower credit score and smaller down payment, FHA loans may be more affordable than Conventional loans. Lenders often require a credit score of at least 620 and a minimum down payment of 5% to qualify for a Conventional loan while an FHA loan may be available with a credit score as low as 580 and a minimum down payment of 3.5%. Keep in mind you will still need to meet credit, income, and financial requirements to get approved for an FHA loan.

Can You Refinance an FHA Loan with Bad Credit?

If you are an FHA homeowner with a lower credit score, you may still be able to refinance using the streamline program. This program allows you to replace your current FHA loan with a new FHA loan that has a lower rate or better terms. These refinances feature less paperwork, more flexible credit standards, and faster closings.

At Freedom Mortgage, we help FHA homeowners refinance with an easy credit qualification. You will need to meet our financial requirements to get your refinance approved. You need to be current on your mortgage payments and have a recent history of paying your monthly bills on time. Refinancing also must result in a real benefit, such as lowering your interest rate, which reduces your monthly mortgage payment. By refinancing, the total finance charges may be higher over the life of the loan.

Does a Lower Credit Score Affect Your FHA Loan Interest Rate?

Yes, a lower credit score can affect your FHA loan interest rate. When you have a lower credit score, lenders may offer a higher rate. In the same way, a higher credit score might help you earn a lower rate. Because FHA loans are backed by the U.S. Department of Housing and Urban Development (HUD), FHA loans often have competitive rates. Ask us what FHA rate we can offer you!

Does a Lower Credit Score Affect Your FHA Closing Costs?

Your credit score might affect your closing costs if you purchase discount points. Discount points are a way for you to buy a lower rate on your FHA loan. If your credit score results in a higher rate, you may decide to buy discount points to lower it. Sometimes you can finance the costs of discount points into your loan amount. Other times you may be required to pay for them at closing.

Applying for an FHA Loan with Bad Credit

If you want to apply for an FHA home loan but are concerned about your credit score, here are things you can do to prepare for the application.

• Check your credit report and credit score. Your credit report includes your total debt, including auto loans and credit cards. Before you apply for an FHA loan, check your credit report and the balances on your other debts. Try to pay these debts down if you can. Payment history is another important part of your credit score. Making regular, on-time payments for loans and credit card bills can help lenders look more favorably on your mortgage application.
• Put together a budget. When you are buying a home, it's important to make a budget to help you decide how much home you can afford. You'll want to be confident you can afford your monthly mortgage payment and all your other bills. Your monthly mortgage payments include interest, principal, homeowners insurance, property taxes, and mortgage insurance premiums when you have an FHA loan. Use our mortgage affordability calculator to help you estimate how much home you can afford.
• Plan for a down payment. One FHA loan benefit is the low down payment requirement. You can increase your chances of having your loan application approved by making a larger down payment on your FHA loan, however. Plus, making a larger down payment will save on interest payments because you will borrow less money to buy your home.

FHA Loans After Bankruptcy

A bankruptcy in your financial history can also affect your credit score. However, the FHA loan program can still help you buy a home after bankruptcy and it can be easier to get an FHA loan after negative events, such as a bankruptcy, compared to a Conventional loan. Loan requirements are different depending on the type of bankruptcy:

FHA Loans After Chapter 7 Bankruptcy

If you’ve filed and been discharged from Chapter 7 bankruptcy, you can still apply for an FHA loan under specific conditions. If two or more years have passed since your bankruptcy has been discharged and you have “reestablished good credit” or have not incurred new credit obligations, you can apply for an FHA loan. You will still need to meet the lender’s other credit, financial, and income requirements to be approved.

You can still apply for an FHA loan after Chapter 7 bankruptcy if more than one, but less than two years have passed, although you will need to meet additional requirements. These include demonstrating the bankruptcy was caused by extenuating circumstances beyond your control and providing recent documentation of your ability to responsibly maintain your finances.

FHA Loans After Chapter 13 Bankruptcy

Since Chapter 13 bankruptcies involve a repayment plan, some borrowers may be eligible for an FHA loan before the repayment plan is complete. If a year has passed and you have made all payments in full and on time, you can apply for an FHA loan. This will also require written documentation from the bankruptcy court to enter into the mortgage transaction. Just like Chapter 7 bankruptcy, you will still need to meet your lender’s credit, financial and income standards to be approved.

Freedom Mortgage is a top FHA lender in the United States according to Inside Mortgage Finance, Jan.–Jun., 2024.

Last reviewed and updated September 2024 by Freedom Mortgage.