Credit Score Requirements for California FHA Loans

FHA loans are a popular mortgage financing option among home buyers in California. They’re particularly popular among first-time buyers who don’t have a lot of cash saved for a down payment. This article explains the minimum credit score requirements for an FHA loan in California.

At a glance: According to current HUD guidelines, borrowers seeking an FHA loan in California must have a “minimum decision credit score” of 500 or higher to be eligible.

California FHA Loan Credit Score Requirements

The Federal Housing Administration loan program is managed by the Department of Housing and Urban Development (HUD). So HUD officials are the ones who establish the eligibility criteria for FHA-insured mortgage loans, and that includes the minimum credit score requirements.

Most of the borrower-specific requirements for FHA loans can be found in HUD Handbook 4000.1 (a.k.a., the Single Family Housing Policy Handbook). But you don’t have to dig through this 1,000-page document to find the relevant portions. We’ve extracted them for you.

Here’s what you should know about California FHA loan credit score requirements:

• According to official guidelines, borrowers need a Minimum Decision Credit Score (MDCS) of 500 or higher to be eligible for an FHA-insured mortgage loan.
• If you want to enjoy the low 3.5% down payment option associated with this program, you’ll probably need a score of 580 or higher (see table below for details).
• The MDCS is the “score reported on the borrower’s credit report when all reported scores are the same,” as the handbook states.
• When three different scores are reported, the middle score becomes the MDCS and will be used for FHA loan qualification purposes. Where two differing scores are reported, the MDCS is the lowest score.

As mentioned above, the Minimum Decision Credit Score is also used to determine the maximum insured financing available to a borrower with traditional credit. So there’s a two-tiered system in place, with 500 and 580 being the key thresholds. The table below comes from HUD Handbook 4000.1, and explains these two thresholds.

Why Are These Scores Important for Borrowers?

Credit scores are three-digit numbers derived from information found within a person’s credit reports. In the U.S., these reports are maintained by three companies primarily: Experian, TransUnion and Equifax. They contain information relating to a person’s borrowing history (personal loans, credit cards, etc.).

The scores are computed using advanced scoring systems or algorithms — but we’re getting into the weeds here.

Your three-digit credit score shows how you have borrowed and repaid and money in the past. A higher number indicates that a person typically pays his or her bills on time. A lower number suggests that a person has had some difficulty repaying debts in the past. This is why HUD has established minimum credit score requirements for FHA loans. They do it for risk-management purposes.

So, how does all of this relate to you, as a home buyer and mortgage shopper? In order to be approved for an FHA loan in California, you must meet the minimum credit score requirements stated above. If your score is well below 500, you might have a harder time qualifying for a loan (of any kind). On the other hand, borrowers with higher scores tend to have an easier time getting approved for mortgages, auto loans, and other forms of financing.

Exceptions, Compensating Factors, and Program Flexibility

There are exceptions to many of the minimum requirements for FHA loans. In some areas, HUD allows for certain “compensating factors” to be used. This is when something positive offsets something negative.

For example, if a person’s debt-to-income ratio is slightly higher than HUD’s preferred range, a mortgage company could find a compensating factor (such as significant cash reserves) to approve the borrower anyway.

There is some flexibility built into the FHA loan program. So borrowers with lower credit scores should not automatically assume they’re unqualified. In these situations, the best course is to speak with a mortgage broker or loan officer who is familiar with the program, to see if there’s a way forward.

Let’s talk: Do you have questions about the credit score requirements for California FHA loans, or other aspects of the program? We can help. Bridgepoint Funding has been serving borrowers across the state of California for more than 16 years. We offer competitive rates on a variety of loan options, including FHA. Contact us today with any questions you have.