Mortgage loans insured by the U.S. Department of Housing and Urban Development's Federal Housing Administration are popular today because they often require a down payment as low as 3.5 percent of a home's purchase price. But borrowers with credit scores that are too low won't be able to qualify for such a loan.
FHA Loans and Down Payments
Loans insured by the Federal Housing Administration, an agency of the U.S. Department of Housing and Urban Development, come with lower down payment requirements than do conventional mortgage loans. Certain borrowers will only need to put 3.5 percent of a home's final purchase price down when taking out a loan insured by the administration. Most traditional lenders, though, require a down payment of 5 percent to 20 percent. That's a big difference; for a house costing $200,000, a down payment of 3.5 percent comes out to $7,000. A down payment of 10 percent for the same house is $20,000.
Credit Score Requirements
To qualify for the 3.5-percent down payment, though, borrowers will need a FICO credit score of at least 580. The good news is that this is not an overly difficult credit score to obtain. Those borrowers who have paid most of their bills on time and who don't have huge amounts of credit-card debt, and who don't have foreclosures or bankruptcies in their recent past, should have a credit score of at least this high.
Lower Credit Scores
Even if your credit score is lower than 580, you can still qualify for a mortgage loan insured by the Federal Housing Administration. Borrowers with scores lower than 580 but higher than 500 still qualify for such loans, but must come up with a down payment of 10 percent instead of 3.5 percent. Those borrowers with credit scores under 500 are not able to take out loans insured by the Federal Housing Administration.
Improving Your Credit Scores
You can improve your credit scores. If you pay your bills on time, pay off as much credit-card debt as you can and close any open credit-card accounts that you are no longer using, you will boost your credit score. Time helps, too: Housing foreclosures and Chapter 13 bankruptcies falls off your credit report after seven years; Chapter 7 bankruptcy filings drop off your report in 10 years. If you practice good spending habits, you can improve your score enough to qualify for a loan through the Housing and Urban Development Department. This takes time, though -- often several years.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.