FHA for First-Time Homebuyers: Why Use an FHA Mortgage?

Why First-Time Homebuyers Love FHA Loans

First-time buyers often prefer FHA loans because they solve many of the problems new buyers can face:

Low credit score? FHA loans allow borrowing as low as 580 Lots of Debt? FHA has relaxed requirements for qualifying with student debtNo cash down payment? Minimum down payment for FHA is only 3.5%

FHA isn't the only low down payment loan on the market. But for many first-time homebuyers who need hand qualification, this is an ideal solution.

Check the eligibility of your FHA loan. Start here (01/20/2022)

In this article (Continue to…)

How FHA-backed loans work

The first thing you need to understand is that the Federal Housing Administration is a mortgage insurer – not a mortgage lender. This is an important distinction. This means you can get an FHA-insured loan from just about any mortgage lender you want.

In other words, you don't go to the FHA to get an FHA loan. Instead, you get your mortgage loan from a regular lender, and the FHA plays its part in the background.

The FHA's role is to protect mortgage lenders. An "FHA insured" loan means that if you ever default on your mortgage, the FHA would reimburse your lender.

How does FHA insurance help the borrower?

With FHA insurance, mortgage lenders can make loans that would normally be considered "too risky" (because of lower creditworthiness, lower down payment, etc.) without worrying about losing money if borrowers are unable to repay them.

Ultimately, this insurance helps borrowers get easier financing — especially when their credit rating or debt burden would not qualify for a traditional loan.

As an added benefit, FHA loans tend to have lower mortgage rates for borrowers with moderate credit ratings.

About FHA Mortgage Insurance Premiums

It's important to note that although FHA insurance protects lenders, borrowers pay for it.

When you get an FHA loan, you cover the cost of FHA insurance by paying Mortgage Insurance Premium (MIP).

MIP includes an upfront fee of 1.75% of the loan amount, which can be paid at closing or included with the loan. And there is an annual fee of 0.85% of the loan amount.

The annual payment is split into installments and added to your monthly mortgage payment. Paying for MIP is the main downside to using an FHA loan. However, if you stay in the home long enough, you can refinance a loan with no MIP. So you don't have to be stuck with these extra costs forever.

Check the eligibility of your FHA loan. Start here (01/20/2022)

FHA as a first-time homebuyer loan

Because of FHA mortgage insurance, homebuyers with a credit rating as low as 580 could get an FHA-backed home loan at just a 3.5% discount. Some homebuyers can even be approved with loan values ​​as low as 500 if they pay 10% later.

FHA loans also typically have below-average mortgage rates.

These terms are particularly friendly to first-time homebuyers, who often don't have large savings accounts or well-established credit.

Such flexible lending rules make it easier to get an FHA-backed loan compared to almost any other type of mortgage.

FHA loans aren't just for first-time homebuyers

Repeat buyers and homeowners looking to refinance can also take advantage of FHA financing — on the condition that they plan to live in the home they are buying. (FHA loans cannot be used for vacation homes or investment property. Primary residences only.)

However, FHA is not the best option for everyone.

Homebuyers with a low down payment but a good FICO score might find a traditional loan cheaper. Likewise, eligible borrowers should consider the VA loan program (for veterans and military personnel) or the USDA loan program (for rural homeowners).

Otherwise, an FHA loan is definitely worth considering.

FHA Mortgage Calculator

You can use this calculator to estimate what your monthly mortgage payment would be with an FHA loan. Check today's FHA rates for a more accurate calculation

Benefits of an FHA Mortgage

There are a number of reasons why the FHA mortgage program is still one of the most popular low down payment loans on the market after almost 90 years.

Here are just a few of them:

1. FHA mortgage rates are often "below market value"

FHA mortgage rates are typically 12.5 basis points (0.125%) or more below rates for a comparable conventional 30-year fixed-rate mortgage.

For loans with down payments of 10% or less, and for borrowers with less than perfect credit, this gap can be even larger.

It is not uncommon for first-time homebuyers, who often have poor credit ratings, to receive an FHA mortgage rate that is more than 100 basis points (1%) below a comparable traditional rate.

However, it's worth noting that the FHA's additional mortgage insurance fees may offset the lower rate. So you should compare the total cost of an FHA loan (including mortgage insurance premium) to a compliant loan to see which is a better deal.

2. FHA loans allow a 3.5% down payment

FHA loans allow for a 3.5% down payment, even for buyers with poor credit.

There are other low and no down payment mortgages available, although most require at least average credit. The FHA has no such restriction.

Additionally, there are no specific eligibility criteria for FHA. In comparison, zero-down loans like VA and USDA have strict rules regarding eligibility, location, and/or income limits.

3. FHA loans allow below average credit scores

The FHA insures loans for borrowers with credit scores of 500 or higher. Most other loan programs require a minimum credit rating of 620.

Note that FHA loans only allow a credit score of 500 to 579 with a down payment of 10% or more. If you want a smaller down payment — 3.5% to 9.9% — you need at least a 580 credit score.

For many homebuyers, especially those on the lower end of the credit scoring spectrum, FHA is the best path to home ownership.

4. FHA loans have no “special rules” for qualification

Unlike other no-down payment mortgage programs, there are no special qualifications required to take advantage of an FHA home loan.

For example, the Department of Veterans Affairs insures a VA loan with no deductions, but only for members of the military. And as mentioned above, the USDA's zero-down loan requires homebuyers to live in less densely populated areas while still meeting certain income thresholds.

Even Fannie Mae's traditional HomeReady Mortgage, which allows for a 3% discount, sets limits based on household income.

The FHA does not require such verification.

You can take advantage of FHA mortgages no matter where you live, what you do, or what you earn. FHA loans are suitable for everyone.

5. You can use an FHA loan to buy a fixer upper

The FHA knows that not all homes are move-in ready. Especially for first time home buyers looking to buy at the cheaper end of the housing market. For this reason, the FHA created the FHA 203(k) loan.

The FHA 203(k) loan helps home buyers planning to upgrade appliances, replace floors, replace a roof, paint rooms, and the like. The cost of these repairs can be financed along with the mortgage.

That means home repairs don't have to be paid for in cash. They can be paid with your mortgage instead. You can read more about how the FHA 203(k) program works here.

Check the eligibility of your FHA loan. Start here (01/20/2022)

Disadvantages of an FHA mortgage

The FHA loan is not without its drawbacks. While it has unique benefits for homeowners, there are a few things to consider before deciding on an FHA mortgage.

1. Not the lowest down payment loan

The smallest down payment you can make on an FHA loan is 3.5% of the purchase price. Traditional loans are slightly lower with down payment requirements starting at just 3%.

That might sound like a small difference. But 0.5% of a $250,000 loan is $1,250. That could make a difference when you're working on a tight budget.

2. The mortgage insurance cannot be terminated

The FHA Mortgage Insurance Premium (MIP) is mandatory. If you pay less than 10% down payment, you will be stuck with mortgage insurance for the life of the loan. And if you pay more than 10% deposit, you pay MIP for 11 years.

On the other hand, a traditional loan's Personal Mortgage Insurance (PMI) can be canceled once your loan reaches an 80% loan-to-value ratio. In other words, it easily disappears once you've built up enough equity in the house.

You can also get rid of FHA mortgage insurance once you've paid off the loan balance down to 80% of the value of your home. But to do that you would have to refinance. This costs money and starts your loan all over again.

So if mortgage insurance is a priority for you, you may prefer a traditional low-down payment loan to an FHA loan.

3. FHA has lower credit limits

The FHA has stricter loan size limits than most other loan options. Credit limits are higher in high-end real estate markets like Seattle, San Francisco, and New York City. But in most locations, FHA loans will not exceed $647,200.

Compare that to the conventional lending limit, which is $647,200 in 2022. Conventional credit limits are also increasing in high quality markets.

If you're looking for the expensive homes in your market – and have the credit qualifications to get a larger loan – you may need a conventional or jumbo loan to complete your new home purchase.

An FHA loan may not be big enough.

Qualifying for an FHA loan as a first-time homebuyer

The process to qualify for an FHA mortgage is similar to how you might qualify for any other type of loan.

After you submit a mortgage application to a lender — either by phone, in person, online, or via an app — you will be asked to provide documentation to support your financial information.

To approve you for an FHA loan, lenders typically look for:

Down payment of at least 3.5% of purchase price Credit rating of 580 or higher Debt-to-income ratio no greater than 45% (50% in some cases) Two-year history of employment and steady income Loan size no greater than $647,200 in most cases AreaOne by the FHA Approved Property Inspection You move in within 60 days of completion

Documents proving your financial status include W2s, payslips and federal tax returns, as well as bank statements and proof of employment.

FHA is not a program for first-time home buyers

FHA loans are good for first-time homebuyers, but you don't have to prove you're a first-time homebuyer to take advantage of the FHA home loan. The program is available to everyone.

Unless you apply for a down payment assistance program or receive your FHA loan through a local housing finance agency, you do not need to complete a homebuyer education course to receive a loan.

However, you will be asked to confirm within 60 days of your degree that the home you have purchased will be your new primary residence.

Once you've completed your checks, your mortgage lender will review your records against the FHA's minimum official standards. These standards, known as "FHA Guidelines," determine whether your loan qualifies for FHA mortgage insurance.

Loans that are eligible for FHA mortgage insurance are approved and funded to close.

Check the eligibility of your FHA loan. Start here (01/20/2022)

Should You Use a Low Down Payment Mortgage?

When you're buying a home, it can be difficult to find the money to pay a down payment. And even if you have a large amount of money for a house, you may decide you don't want it.

Closing costs are a big reason to keep your down payment low. Closing costs are typically 2-5% of the loan amount — or up to $10,000 on a $200,000 loan.

These costs usually have to be paid out of pocket at the final table along with your deposit.

Installment programs can help

Closing and down payment assistance programs can help you with your upfront payments. Or you could ask family members to contribute to your goal.

But whether you're using savings, a grant, or gifts from family and friends, you need to plan for both your down payment and closing costs.

For example, if you budgeted $20,000 to buy a home, you might only be able to use about $10,000-$15,000 of that for a down payment. The rest goes towards closing costs.

More benefits from a lower deposit

There are other valid reasons to pay a smaller deposit as well.

For example, let's say the house you are buying needs repairs. Maybe you want to save your money on DIY jobs.

Or if you're having a kid, paying college tuition, buying a new car, etc., you might not want to use your cash savings for a down payment on a house.

There are many reasons you might not want to make a large down payment, and an FHA loan is just one of the low, no down payment mortgage options available to you.

Frequently asked questions about FHA loans for first time buyers

Is it Difficult to Qualify for an FHA Loan?

Compared to most other types of loans, the FHA has looser underwriting rules. Borrowers with a 580 credit score can buy a home with a down payment of just 3.5 percent. Also, FHA loans typically have lower interest rates than other loan options. However, the annual percentage rate (APR) of the loan will be higher because the FHA requires mortgage insurance premiums.

Who is not eligible for an FHA loan?

Unlike many types of mortgages that favor first-time homebuyers, FHA loans are open to anyone who can meet the lender's and FHA's requirements. But not every home is eligible for an FHA loan: The FHA does not insure vacation rental, second home, or investment property loans—only primary residences.

What is the minimum down payment for an FHA loan?

The minimum down payment for an FHA loan is 3.5%. That's $3,500 for every $100,000. If your credit score falls below 580, you must drop 10%.

What is the income limit for an FHA loan?

The FHA does not set income limits for borrowers. However, your income factors do factor into the underwriting process of your loan. It affects your debt-to-income ratio (DTI), which tells lenders whether you could afford to pay the loan each month.

How long does FHA approval take?

Expect your FHA loan approval process to take 45 to 60 days. You can keep the process moving by submitting your financial documents and answering your loan officer's questions as quickly as possible.

Can I get an FHA loan if I already own a home?

Yes, you can take advantage of an FHA loan even if you already own a home — but only if you intend to use your new home as your primary residence.

Does the FHA protect me from foreclosure?

The FHA does not protect you from losing your home if you stop making monthly payments. The FHA's role is to protect your lender from losing money if you default on your payments. This protection gives lenders the confidence to lend to borrowers with below-average credit scores and lower down payments.

Can I use an FHA loan to buy a HUD home?

FHA loans fund the purchase of a HUD home. A HUD house is owned by the U.S. Department of Housing and Urban Development. HUD is taking ownership of homes that were funded by FHA loans but have gone into foreclosure.

Do Sellers Discriminate on FHA Loans?

Some sellers and real estate agents associate FHA loans with government bureaucracy. However, most realtors know that qualifying through FHA isn't much different than buying on a traditional loan, so long as the new home is safe and connected to utilities and roads.

How do I apply for an FHA loan?

Thousands of private mortgage lenders are authorized to issue FHA loans, including local credit unions, national banks, and online lenders. It's wise to look at at least three lenders to compare rates and costs. Start by applying for a mortgage pre-approval, which can show your maximum loan amount and borrowing costs.

What are today's FHA mortgage rates?

First-time homebuyers have access to many low and no down payment mortgage loans. Of all the loan options available, the FHA loan is the most comprehensive and accessible for today's buyers.

FHA interest rates are typically lower than other mortgages. They're a particularly good deal today, when mortgage rates are hovering near all-time lows.

Confirm your new plan (January 20, 2022)

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