An October 2018 report published by CoreLogic (a housing analytics and research company) showed that the average credit score among home buyers using an FHA loan dropped to 681 during 2018. A few years back, during the first quarter of 2011, the average credit score among home buyers using FHA loans was 709.
This indicates that a higher percentage of borrowers with lower scores are using this particular program to finance their home purchases. It’s a trend that could continue into 2019.
Average Credit Score Among FHA Home Buyers
CoreLogic’s study examined a variety of trends relating to mortgage underwriting standards, for both FHA and conventional home loans. Among other things, they discovered that the average credit score among home buyers using the FHA program has dropped steadily over the last seven years or so.
To quote the report:
“Since Q2 2011, the average credit score of homebuyers with FHA loans has declined steadily (709 in Q1 2011 to 681 in Q2 2018) making loans more accessible to borrowers with moderate credit history.”
In contrast, the average score among home buyers using a conventional mortgage loan has remained largely unchanged since 2009. It has hovered within the range of 758 – 763 over the last nine years or so.
So it seems that the credit standards used by mortgage lenders have eased over the years for FHA borrowers, while holding steady for conventional borrowers.
The key takeaway for borrowers is this. If you have a relatively low score, you might have an easier time getting approved for an FHA loan than conventional. But it’s still wise to explore all of your financing options.
How Low Can You Go?
The 680 credit score mentioned above is just the average among FHA home buyers for the second quarter of this year. The official minimum required score is quite a bit lower. But here, it’s important to understand the difference between the program requirements set forth by HUD, and the requirements of individual mortgage lenders.
The FHA loan program is managed by the Federal Housing Administration, which falls under the Department of Housing and Urban Development (HUD). According to HUD Handbook 4000.1, borrowers need a “minimum decision credit score” of 500 or higher to be eligible for an FHA loan. A score of 580 or higher is required for maximum financing, and to take advantage of the 3.5% down payment option.
But those are just the official minimums. Mortgage lenders can set their own standards for credit scores as well, and these can vary from one lender to the next. So the only way to know if you qualify for the program is by speaking to an FHA-approved mortgage lender (or more than one, ideally). Meeting the minimum credit score requirement, by itself, does not automatically qualify a borrower for this program.
FHA Borrowers Are Carrying More Debt as Well
The above-mentioned report also showed that the average debt-to-income (DTI) ratio has risen, among home buyers using this program. It said that the “DTI for FHA loans started to rise after Q2 2015 and had reached its highest level in at least 14 years during Q2 2018 at 43 percent, up from 42 percent in Q2 2017.”
This means that borrowers are qualifying for and using FHA-insured mortgage loans with a higher level of debt than before, on average. So there appears to be some easing in this area as well.