Question: “I have heard that FHA home loans are easier to get than regular mortgages. It this true? I’m asking because I have a bad FICO score. Do FHA loans depend on your credit score, and if so how much?”

Yes, your credit score will be a factor in the approval / rejection process. But there are several things you should know about it, right off the bat:

  • Credit is only one piece of the qualification process. Lenders will also look at your income, the current amount of debt you’re carrying, and other financial factors. So while a good FICO score will certainly help you get approved, there are other things you need to consider.
  • Generally speaking, it’s easier for people with bad credit to get an FHA loan than a conventional loan (that’s not backed by the government). The lender is insured against losses resulting from borrower default, so they’re more willing to work with people in your situation.
  • The FHA is getting more strict with their views toward consumer credit. In the past, they haven’t had much of a policy toward FICO scores. It was the lender’s call. But that is beginning to change. Currently (April 2010), there’s a proposal on the table to set tighter restrictions on credit scores, down payments and other areas of the mortgage program.
  • Back in January, the Department of Housing and Urban Development (HUD) put out a news release about some of their proposed changes. Here’s a link to the release.

So yes, FHA loan approval will depend on your credit score and other factors. Keep in mind also that you will pay a higher interest rate when you borrow with a low FICO score. For example, consider the following quote from the Chicago Sun-Times:

“A homeowner with a $100,000 mortgage and a 520 credit score will pay $110,325 more in interest charges over the life of a 30-year loan than a homeowner with … a credit score of 720 [as a result of the higher interest rate charged to the first homeowner].”

This applies to conventional mortgages and FHA loans alike. The lender sets the interest rate on your loan, and they will partly determine the rate by your credit picture. If this doesn’t motivate you to boost your score, nothing will.

Related article: FHA loan requirements

Disclaimer: This answer is provided for educational purposes only. In the end, only a mortgage lender can tell you whether or not you meet their guidelines for the FHA loan program. So it might be in your interest to speak with one. We also recommend establishing a home-buying budget for yourself, before you start applying for loans.

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