FHA Loans For First-Time Buyers: From A to Z

fha loans for first-time buyers

What are some of the most important things you need to know when it comes to FHA loans for first-time buyers? Continue reading to learn more.

Originating during the Great Depression of the 1930s, FHA loans emerged as a home financing option that allowed lower-income Americans to borrow money for a home that they would otherwise not be able to afford. 

This program, backed by the US Federal Housing Administration, was developed as a solution to the rising rates of foreclosures and defaults, ensuring that lenders had sufficient insurance to minimize risks and losses. At a later stage, PMI (private mortgage insurance) companies appeared as a way to provide additional back-up.

Fast forward to today, FHA loans are among the best options for first-time buyers, allowing them to purchase their desired home without the strict requirements of conventional loans. 

In this article, we will talk about FHA loans for first-time buyers – so, if you are looking to become a homeowner and build your way towards a more stable and predictable financial future, continue reading: 

1. What are FHA loans?

FHA loans, also known as the Federal Housing Administration loans, are mortgages backed by the government. They are designed for low-to-moderate-income borrowers with lower credit scores and without much savings to be able to purchase a home. 

FHA loans are typically more lenient than conventional loans, offering lower minimum down  payment requirements and credit scores. This makes them more accessible to a broader range of people, giving them the opportunity to buy their first property.

2. What are the benefits of FHA loans for first-time buyers?

For first-time buyers, FHA loans offer several benefits: lower down payments, lenient credit score requirements, competitive interest rates, and the ability to use gift funds for down payments and closing costs. 

FHA loans for first-time buyers come with a lot of pros, but they also come with some cons – let’s take a quick look:

Pros:

  • Easier credit qualifications, which means a credit score as low as 620
  • Shorter time to qualify after a major credit event (as opposed to regular loans)
  • Higher debt-to-ratio allowed, which can be as high as 50% depending on your financial situation
  • Higher tolerance on gift funds, as opposed to conventional loans where mainly gift funds from relatives are accepted
  • Transferrable to other potential buyers, potentially making the property more attractive upon resale
  • Low-income ceilings, meaning that there are no income limits that may be restricting your chance of approval by a lender

Cons:

Of course, if you are looking for an FHA loan as a first-time buyer, keep in mind that there are some disadvantages as well – this can help you make a well-informed decision:

  • They come with loan limits, which means that there is a cap on how much you can borrow – $472,030 in most of the US, although it may vary by location. You can check the exact limit here.
  • There may be certain property restrictions, requiring the property to meet specific health and safety standards, thus potentially limiting choice.
  • Slower equity buildup due to the lower down payments compared with conventional loans. In other words, it may take longer to build equity in the home.
  • Mortgage Insurance Premiums (MIP) are obligatory for all FHA loans, as they protect lenders against losses. However, they may increase the overall cost of the loan. 

3. What are the FHA loan requirements for first-time buyers?

For first-time buyers, FHA loan requirements include a minimum credit score of 580, steady employment history, the property being the primary residence, meeting property standards, a debt-to-income ratio under 43%, and mandatory mortgage insurance.

FHA loans for first-time buyers use the same mortgage contract as standard home loans

The buyer borrows a certain amount of money, agrees on returning it on monthly instalments as established by the lender, and agrees to pay it off in a certain amount of years (the maximum term is typically 30 years).

On top of lower down payments and credit scores, some additional requirements of FHA loans for first-time buyers include: 

Employment history

You should be able to show a steady employment history for the past 2 years. This proof usually comes in the form of pay stubs, federal tax returns, bank statements, W-2 forms, as well as an employment verification letter. 

Primary residence

In order to qualify for an FHA loan, you must commit to this property being your primary residence. This means that you should occupy it within 60 days of closing – you can’t use this type of loan for renting or other types of investments.

Property appraisal

As we mentioned earlier, among the main FHA loan requirements is ensuring that the home meets certain safety and structural integrity standards (Minimum Property Standards, or MPS). 

It should be appraised by an FHA-approved appraisal, who establishes the value of the property on the market, determines the maximum loan amount you can borrow, and checks for conditions that may pose a threat to the occupant.

Debt-to-Income Ratio (DTI)

Among the main benefits of FHA loans for first-time buyers is that they allow for a more lenient maximum DTI ratio, which can be up to 50% if certain compensating factors are met. 

In comparison, conventional loans cap the maximum DTI ratio at 43%, VA loans require 41% or less, and USDA loans require 41% as well. 

Mortgage insurance (MPI)

While a mortgage insurance is not obligatory for conventional loans (only when certain conditions are met), it is obligatory for all FHA loans as it provides protection against losses if a borrower defaults on a loan.

Loan limits

Another requirement of FHA loans for first-time buyers refers to loan limits. As we discussed previously, there are limits that are set by the Federal Housing Administration, they depend on the area and the type of property, and are adjusted annually.

The latest loan limits are:

  • $472,030 for most areas in the USA (for a single-family home)
  • $1,089,300 in high cost areas (San Francisco, New York City, Los Angeles, etc.)

No delinquencies

And last but not least, it is important that borrowers don’t have any delinquent federal debts or tax clients. If they do have them, they should have a plan set in place to pay off these debts as soon as possible. 

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4. What are the FHA loan income requirements?

Federal Housing Administration loans don’t have specific income requirements but instead, they focus on your debt-to-income (DTI) ratio. Lenders typically look for a DTI ratio under 43%, considering your total monthly debt against your gross monthly income. 

However, lenders can allow you to have a DTI ratio of up to 50% if certain conditions compensate – for example, if you have a higher credit score, a strong credit history, a substantial amount of savings, or if the mortgage payment isn’t much higher than your current housing costs.

Stable, verifiable income is crucial when it comes to FHA loans for first-time buyers, along with meeting other lending criteria.

5. FHA loan vs conventional loan: what are the main differences?

The main differences between FHA loans and conventional loans are the down payment (which is lower for FHA loans), the credit score requirements (as low as 580 for FHA loans compared with 620 for conventional loans), the need for Mortgage Premium Insurance (obligatory for FHA loans but not for conventional loans), etc.

In addition, FHA loans have lower loan limits than conventional loans, and they require the property to meet certain health and safety criteria.

Federal Housing Administration loans are also generally more accessible to first-time homebuyers, as well as those with lower incomes or credit scores. On another hand, conventional loans are better for borrowers with stronger credit and higher incomes.

6. What are the closing costs of FHA loans?

Closing costs for FHA loans typically range from 2% to 6% of the loan amount and include appraisal, credit report, origination fees, attorney fees, title insurance, inspections, recording fees, and upfront mortgage insurance premium. 

Sellers can contribute up to 6% of these costs.

7. How do I apply for an FHA loan?

To apply for an FHA loan as a first-time buyer, there are a few simple steps that you can do in order to purchase your dream home. Let’s take a look:

  1. Check eligibility – first, you need to ensure that you meet the basic requirements which we detailed earlier. This includes meeting the criteria for credit score, DTI ratio, employment history, primary residence, and no delinquencies. 
  2. Prepare documentation – in order to prove to the lender and the Federal Housing Administration that you are indeed meeting these requirements, you must prepare all the documentation necessary – pay stubs, bank statements, W-2 forms, federal tax returns, etc.
  3. Find an FHA-approved lender – next, find an FHA-approved lender such as Jet Direct Mortgage. Choosing the right lender is crucial for a hassle-free home buying process, that’s why we deliver unmatched customer service.
  4. Get a pre-approval – before you start looking for your home, make sure to get a pre-approval from your lender of choice. This gives you an idea of how much you can borrow, and shows sellers that you have serious intentions about buying.
  5. Find a property – here comes the fun part – finding your dream property! Look for a home that fits your budget, as well as meets the FHA property standards that we discussed previously in the article. 
  6. Apply for a loan – now, it’s time to apply for the FHA loan through your chosen lender. You should be prepared to provide all the necessary documentation. With Jet Direct Mortgage, you can apply seamlessly and easily here
  7. Undergo appraisal – the property will need an FHA-compliant appraisal to assess its value and condition.
  8. Await approval – once you have submitted all the information and documentation, the lender will review your application, verify your financial status, and perform credit checks. Once approved, you will close the loan and finalize the mortgage. And you are ready to move in!

FAQ

What will disqualify you from an FHA loan?

Disqualifiers for an FHA loan include a credit score below 500, a high debt-to-income ratio (over 50% in most cases), a history of bankruptcy (without meeting waiting periods), a foreclosure within the last three years, and a record of delinquent federal debts or tax liens.

Can I qualify for an FHA loan with a low credit score?

Yes, it’s possible to qualify for an FHA loan with a low credit score. The minimum required score for the maximum financing is typically 580. For scores between 500 and 579, you may still qualify but with a higher down payment.

Can you get an FHA loan if you are not a first-time buyer?

Yes, you can get an FHA loan even if you are not a first-time homebuyer. FHA loans are available to any qualified buyer who meets the eligibility criteria, including credit score, income, debt-to-income ratio, and the property meeting FHA standards.

What property types are eligible for FHA loans?

Eligible property types for FHA loans include single-family homes, 2-4 unit properties, HUD-approved condominiums, and manufactured homes that meet FHA standards. The property must be the borrower’s primary residence and meet specific health and safety guidelines.