More Insight on How to Get an FHA Loan, Courtesy of Audit

Story summary: An annual audit conducted at the end of 2012 sheds new light on what it takes to get an FHA loan these days. Apparently, having a credit score of 640 or higher helps a lot.

Each year, the Federal Housing Administration (FHA) must undergo a third-party financial audit. The purpose of the audit is to measure the agency’s financial health and market performance, among other things. The 2012 audit was conducted by Integrated Financial Engineering, Inc.

640+ Credit Score Appears to Be ‘Sweet Spot’

The findings revealed quite a bit about the FHA loan program. For instance, we can glean from the report that California generates the most government-insured loans of any state (no surprise). We also learned that the FHA’s market share has increased dramatically since the housing market tanked – also no surprise, when you consider how the conventional mortgage market has tightened since then.

Another small but significant data point offers insight into what it takes to get an FHA loan these days. It has to do with credit scores.

  • Over the last three years, approximately 90% of all FHA loans went to borrowers with credit scores above 640.
  • Fewer than 10% went to borrowers with scores between 600 and 639.
  • Below the 600 credit-score range, there was very little lending activity.
  • The average credit score for home-purchase loans in 2012 was 700.

(Hats off to Jeff Mifsud for elucidating this data, in an article for National Mortgage Professional Magazine.)

This may come as no surprise to mortgage lenders. After all, they deal with these dynamics on a daily basis. But for the average consumer considering a government-backed mortgage, this information is very useful. It removes some of the mystery of how to get an FHA loan.

You might look at these numbers and think people with scores below 600 simply aren’t applying for the program. I can assure you they are. They just aren’t being approved. At least, not in great numbers. I look at this data and see a clear trend – most lenders are requiring scores of 640 or higher when qualifying applicants for this program.

Want to get an FHA loan? Take a look at your credit score. It’s a good place to start.

What Else You’ll Need to Get an FHA Loan

Of course, good credit isn’t the only thing you’ll need to get an FHA loan. Borrowers are also required to make a down payment of at least 3.5% of the purchase price. Conversely, this means the mortgage’s loan-to-value (LTV) ratio is limited to 96.5%.

Debt ratios are another key aspect of the FHA approval process. If your combined debts use up more than 50% of your gross income, you may have trouble getting approved for this program. Here are some other eligibility requirements you should know about.

Disclaimer: While these numbers do help us understand how to get an FHA loan in the current mortgage market, they are not set in stone. Mortgage lenders have some degree of flexibility when approving borrowers for this program. Credit scores are a good example of this. Some lenders may require a score of 640 or higher, while others approve borrowers with scores down to 600. The same goes for debt ratios and other qualifying factors. The information presented above relates to general trends in the lending industry. The only way to find out if you can get an FHA loan is to apply for one through a HUD-approved lender.