Marcus pulled his credit reports last March and saw a 561. Two collections, a charged-off phone bill from 2019, and a car loan he’d paid late four times during a layoff. His bank’s loan officer told him to come back in a year.
Seven months later he closed on a $218,000 townhouse with 10% down. Same score range. Different lender. Same program, technically. FHA loans for bad credit are the most forgiving mortgage product on the market, but only if you understand where the real limits sit, and it isn’t where most people assume.
The FHA score floor is 500. Your lender’s floor is probably higher.
FHA itself insures loans down to a 500 credit score. Below 500, you’re out of FHA territory entirely, and you’re looking at portfolio lenders or hard money, both of which will cost you badly.
Between 500 and 579, you need 10% down instead of 3.5%. At 580 and above, the standard 3.5% down payment opens up. That’s the federal rule. The catch is that banks layer their own requirements on top of it. These are called overlays, and they’re why a loan officer at a national bank might tell you no while a broker down the street gets you a clear-to-close.
Many large banks set their own minimum at 620 or 640 for FHA loans. Credit unions tend to be more flexible. Non-bank lenders and brokers who specialize in government lending often go down to 580, and a smaller number will work with the 500-to-579 tier if the rest of the file is strong. Before you spend an hour on an application, ask one question: what is your minimum FHA credit score? It saves a lot of wasted effort. Our breakdown of FHA loan credit score requirements explains what each of those thresholds unlocks in practice.
What bad credit actually costs you in dollars
FHA is generous on eligibility and unforgiving on price. There are two layers of cost.
The first is mortgage insurance, which every FHA borrower pays. You pay 1.75% of the loan amount up front, which is usually rolled into the balance. Then there’s an annual premium, roughly 0.55% of the loan per year for most 3.5% down loans, paid monthly. It drops to about 0.50% if you put 10% down. On a $240,000 loan, that’s around $110 a month either way.
The second layer is credit-based pricing. FHA’s rate adjustments get steeper as your score falls. At a 600 score, you might pay a fee equal to 1% to 2% of the loan amount, charged as discount points at closing or baked into a higher rate. On a $240,000 loan, 1.5 points is $3,600 cash at closing, or roughly $35 more per month across a 30-year term. It’s real money, but it isn’t the deal-breaker people imagine. FHA mortgage rates are worth comparing across at least three lenders, because the pricing adjustment varies more between lenders than the base rate does.
Compensating factors that push a weak file through
When your credit score is low, the automated system may refer your file to a human underwriter. That’s not a death sentence. Manual underwriting is where strong compensating factors earn their keep.
- Cash reserves. FHA technically requires one month of reserves after closing. Three to six months of verified savings moves a borderline file from maybe to yes.
- Debt-to-income under 43%. Underwriters can stretch to 50% with manual approval, but only when other factors pull weight. Getting a car payment or a store card balance off the books before applying lowers that ratio fast.
- Job stability. Two years in the same line of work, even across two employers, reads as reliable income. A gap of more than six months needs a written explanation.
- Twelve months of on-time rent. Cancelled checks, bank statements, or a landlord letter all work. A clean housing history offsets a messy credit card history better than most borrowers realize.
- Utility and phone payment history. Many lenders will accept these as alternative tradelines if your credit file is thin.
Fix the report before you apply, not after
Order all three credit reports from AnnualCreditReport.com and read them line by line. Roughly a fifth of reports contain an error significant enough to lower a score, and disputing one takes a few weeks. That’s the cheapest mortgage improvement available.
A few sequencing rules that matter:
Don’t open new credit within six months of applying. A single new card can knock 10 to 20 points off a mid-range score. Don’t close old accounts you’ve paid off either, since credit history length is part of the score.
Collections are more nuanced than most people think. FHA no longer requires you to pay off most collection accounts to qualify, but balances over $2,000 typically need a payment arrangement that counts against your debt ratio. Ask the lender whether a collection needs to be satisfied before you hand over money, because paying an old debt can sometimes reset the clock on how recently it reports as active.
If a lender finds an error that’s suppressing your score, a rapid rescore can update it in three to five business days rather than the 30 to 45 days a normal dispute takes. Ask for one specifically. Most buyers never hear the term.
Down payment money when cash is tight
At 3.5% down, a $250,000 purchase needs $8,750 down plus closing costs, usually another 2% to 3%. Gift funds from family are allowed on FHA loans with a signed gift letter, and the donor doesn’t have to be a relative in every case. Down payment assistance programs exist in every state, many of them structured as second liens at 0% interest.
One strategic point: if you can reach 10% down, you’ll pay a lower annual mortgage insurance rate. But don’t drain your savings to get there. Our guide to the FHA loan down payment covers the closing costs and prepaid items that catch people short at the finish line.
How much house your FHA loan will actually cover
FHA caps the loan amount by county, and in expensive metro areas that ceiling is higher than most people expect. In low-cost rural counties, it can be low enough to matter. If the home you want sits near the cap, you can sometimes pair an FHA loan with a small second mortgage or adjust your target. The FHA mortgage loan limit is set county by county, so check your specific area before you fall in love with a listing.
When FHA is the wrong tool
If you’re a veteran, a VA loan beats FHA on every axis: no monthly mortgage insurance, 0% down, and more flexible credit standards. If the property is in a qualifying rural area, USDA offers similar advantages.
And sometimes the winning move is waiting. Moving from a 580 to a 640 score can cut your upfront pricing adjustment by more than a full point, and at 660 the improvement is bigger still. Six months of on-time payments, a paid-down balance, and one successful dispute can move you that far. Run the math on what the rate difference costs you over the first five years before deciding that speed beats price.
Ask any lender three questions before you send over a single document: what’s your minimum FHA score, do you underwrite manually when the automated system refers a file, and how many FHA loans did you close last quarter with a borrower under 620. The answers tell you more about your odds than your credit score does.