What does a borrower with a credit score below 580 typically need when working with the FHA?

When a borrower has a credit score below 580 and is seeking to obtain a mortgage through the Federal Housing Administration (FHA), one key requirement is that they need to make a larger down payment. The FHA generally allows borrowers with lower credit scores to qualify for loans, but they impose stricter conditions, including requiring a minimum down payment that increases based on the credit score.

For borrowers with credit scores between 500 and 579, the FHA mandates a down payment of at least 10%. In contrast, borrowers with a score of 580 or higher can qualify for the minimum down payment of 3.5%. This policy is designed to mitigate risk for lenders when dealing with borrowers who have lower creditworthiness, ensuring that these borrowers have more equity in their home from the outset.

While the other options might present additional challenges for a borrower with a low credit score, such as potentially facing higher interest rates, the most definitive requirement linked to the FHA's guidelines for these borrowers is the necessity for a larger down payment.