FHA Loans For First-Time Homebuyers

FHA Loan First-time homebuyer

If you’re a first-time homebuyer, an FHA loan can be one of the best options available. Let’s see what makes FHA loans so great for first-time homebuyers.  

FHA Loans are Perfect for First-Time Homebuyers

AS a first-time homebuyer you’ll love FHA loans because they help to remove many of the roadblocks buyers often face.

  • Low Credit Score: FHA loans work with buyers with credit scores as low as 500
  • Short on Cash? : FHA loans offer down payments as low as 3.5% of the purchase price if your credit score is 580 or higher.
  • Past Credit Issues?: FHA is more flexible on collections, charge offs, bankruptcies, foreclosure, and late payments than most.
  • Have Student Loans?: New FHA Loan Student Guidelines allow for more flexibility with student loans as well.
  • Lower income or high debt?: FHA allows for a higher debt to income ratio than any loan program other than VA.

While FHA doesn’t offer the only low down payment loan program out there it is much more flexible than most.

What is an FHA Loan?

An FHA loan is a mortgage product that is backed by the Federal Housing Administration. The FHA is part of HUD or Housing and Urban Development. 

FHA Loans were established by the National Housing Act on June 27th, 1934 to facilitate home financing, improve housing standards, and increase employment in the home-construction industry in the wake of the Great Depression.

The FHA’s primary goal was to make housing more accessible to home buyer’s by insuring their loans against default.  By insuring the loans, it prompted banks to lend more to buyers who otherwise could not buy.

FHA loans have less restrictive credit requirements and easier down payment options.

It is important to note that FHA does not lend money to borrowers, they simply insure the loans in the event a borrower defaults.

FHA and other government backed programs make it possible to buy a home without putting 20% down.


Why FHA Loans for First-Time Homebuyers?

48% of first-time home buyers list saving a down payment as their number one obstacle when buying a home.

Programs like FHA loans allow first-time home buyers the option to buy a home without having to save 20% down. Because of FHA mortgage insurance, even home buyers with less than perfect credit have an opportunity to own a home.

FHA loans offer lower mortgage insurance rates for borrowers under a 700 credit score.  FHA also provides lower than average interest rates.

FHA Loans Don’t Require you to be a First-Time Homebuyer


If you aren’t a first-time home buyer you can still use an FHA Loan.  FHA offers loans for repeat home buyers as well as home owners who want to refinance their home. FHA also offers renovation and construction loans.  Most of the time you cannot have two FHA loans unless you meet certain stipulations.

As long as the home you are mortgaging is your primary residence and you don’t have another FHA loan that isn’t be paid off you should be in the clear.

Pros of FHA Loans for First-Time Homebuyers

1. FHA Loans have flexible credit requirements

FHA backed mortgage loans are known for their flexibility. If you had past credit issues FHA is going to be one of the best options for you. FHA offers shorter waiting periods for borrowers who have filed bankruptcy or had a foreclosure or short sale.

If you have outstanding collection accounts FHA doesn’t require you to pay them off in order to get a loan.

Not only this, but FHA also works with borrowers with lower credit scores. Many lenders will only accept applicants with a credit scores of 620 or higher.

With FHA they will insure borrower with credit scores as low as 500, but you’ll need to be at least 580 to put only 3.5% down.


2. FHA has lower down payment requirements.

FHA loans only require 3.5% down even for buyers who some credit issues. While other programs like USDA offer no down payment options, you’ll need better credit to qualify.

FHA also doesn’t require you to have any special eligibility like VA or USDA.

3. FHA Rates Are Usually Lower Than Average

Many FHA borrowers would find it difficult to qualify for a conventional loan. Often this is due to prior credit issues.

FHA offers rates that are often on par or even lower than conventional interest rates.

Borrowers with scores under a 640 will also find cheaper mortgage insurance costs as well.

Lower rates and lower PMI mean a lower monthly payment. With rising home prices first-time home buyers need all the help they can get.


4. FHA Loans Have No Income Limit


Other low down payment programs like USDA, Home Ready, and Home Possible have income limits that can restrict who can use the program.

FHA has no income limits which means borrowers from all income backgrounds can qualify.

FHA does have loan limits which for 2022 range from $420,680 for most areas to $970,800 for high cost areas.


Drawback When Using an FHA Loan


1. Upfront Mortgage Insurance Premium

The upfront mortgage insurance premium of 1.75% of the loan amount can be unfavorable when using FHA.

On a $200,000 loan this means roughly $3500 will be rolled into your loan amount. This isn’t something you pay out of pocket at closing but you will pay for it over the life of the loan.

While no one wants to have such a large dollar amount added to their overall loan, this helps the program operate and still saves you a ton over putting 20% down.

2. You Can’t Cancel The Mortgage Insurance

When using a Conventional Mortgage, you can drop the PMI when your loan to value reaches 80%.  On FHA unless you put down 10% the Mortgage Insurance Premium (PMI) stays on the loan forever.

While this can be frustrating many home buyer’s only stay in their homes less than 10 years. For those who do stay, many FHA borrowers will refinance into a conventional loan without PMI later.

3. The 3.5% Down Payment

While the 3.5% minimum down payment is low comparatively speaking, it can still be tough for first-time home buyers.

If you find saving for a down payment hard, it may be worthwhile to check out the USDA Rural Development Loan. You’ll need average credit and be willing to not live inside major city limits.

4. Lower Loan Limits

If you live in a high cost area or need to purchase a home over $420,680 this can be difficult. Conventional Loans allow you to borrow up to $647,200 but come with all the limitations we’ve already discussed.

If you are shopping for an expensive or luxury home in your area, you’ll need to have the credit qualification to go with a conventional or jumbo loan.

How to Qualify for an FHA Loan as a First-Time Homebuyer

Qualifying for an FHA loan isn’t all that different than any other loan. 

First, you’ll need to contact a lender to start an application. You can do you application online or over the phone.

Next, gather important documents to the loan process.

You’ll Need:

  • Paystubs
  • 2 years of W2’s
  • Copy of Driver’s License
  • Last 60 Days of Bank Statements
  • Last Two Years of Tax Returns

There could be more documents needed once your application is reviewed but these will be a great head start.

To be approved for an FHA Loan we’ll look for:

  • Two-Year Employment history (can be different jobs or school)
  • Debt to Income Ratio Under 50% (Though exceptions are made up to 56%)
  • Down Payment Funds of 3.5%
  • Steady Income

If you have things like bankruptcies, foreclosures, defaulted government debts (like student loans) collections, charge-off’s or other credit issues these will have an impact on your approval.

I hope you can see now that FHA loans are perfect for first-time home buyers. They provide opportunities of homeownership to many people who wouldn’t have them otherwise.

About The Author

Channing Moore

Channing is the owner of Bayou Mortgage. He is passionate about empowering people through education and training to own a home. In his spare time you can catch him at church, reading a book or working on his latest project.

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