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FHA Loans for First-Time Buyers: Requirements & Qualifications

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The FHA loan is the oldest and most well-known low down payment mortgage for first-time home buyers. It’s the catch-all option for buyers who don’t meet other low and no down payment mortgage requirements.

The FHA, founded as part of the National Housing Act of 1934, helped stabilize U.S. housing in the late-1930s.

Because banks were frightened to make home loans and housing was integral to the recovery, the government launched the FHA as an insurance agency for banks. So long as a homeowner and its mortgage met the government’s specified requirements, the FHA agreed to repay the bank should a homeowner default on its payments.

With FHA mortgage insurance available, banks started making loans to first-time buyers again, and housing led the country out of Depression.

Nine decades later, the FHA’s flagship mortgage loan has helped tens of millions of Americans purchase their first home. Nearly 1 in 5 first-time buyers use FHA financing. 

This post covers the history, requirements, limits, types, and tips for applying for an FHA loan as a first-time home buyer.

Get pre-approved to use an FHA mortgage.

What is an FHA Loan?

Three main traits define FHA loans:

  • A down payment requirement of 3.5 percent
  • All credit ratings accepted and allowed
  • Loan sizes within the FHA’s insurance policy limits

Also, FHA loans are assumable, which means that when a buyer sells their home, the new owner can use the same FHA mortgage at the same mortgage interest rate. 

Assumable loans can help you sell at the top dollar when mortgage rates rise.

What are FHA Loan Requirements for First-Time Buyers?

FHA-backed mortgages use the same mortgage contract as other U.S. home loans. Buyers borrow money, agree to monthly payments, and pay off the loan in their choice of 15 or 30 years.

There is no penalty for selling your home before the loan gets paid off, and, as the homeowner, buyers retain the right to pay their loan off faster or refinance it.

According to mortgage software company ICE, the typical FHA home buyer makes a down payment of less than 5 percent.

What is the Minimum Down Payment on an FHA Loan?

FHA loans require that buyers make a down payment of at least 3.5 percent against the purchase price, or $3,500 for every $100,000. There is no maximum down payment amount.

What is the Minimum Credit Score For an FHA Loan?

FHA loans require most buyers have a credit score of 580 or higher, but borrowers with scores as low as 500 are eligible with a down payment of 10 percent or more.

Get pre-approved to check your credit score.

How Much Is The FHA Mortgage Insurance Premium (MIP)?

February 22, 2023, the FHA announced a new mortgage insurance premium schedule for all FHA-backed mortgages.

The new FHA MIP schedule applies to mortgages with FHA case numbers assigned starting March 20, 2023. FHA case numbers are assigned when buyers apply for an FHA mortgage.

FHA home buyers pay mortgage insurance in two parts.

  1. Upfront Mortgage Insurance Premium (UFMIP)
  2. Annual Mortgage Insurance Premium (MIP)

Under the new FHA mortgage insurance schedule for 2023, upfront mortgage insurance costs 1.75 percent of the loan amount, and annual MIP rates vary by down payment, loan size, and loan length.

The FHA automatically adds upfront MIP to a buyer’s loan balance as a built-in expense. Then, it collects 1/12 of the annual mortgage insurance monthly in the buyer’s regularly scheduled mortgage statement.

Click for FHA mortgage rates.

30-Year FHA mortgage with a 3.5 percent down payment

  • 0.55 percent MIP per year, or $550 per $100,000 borrowed
  • For loan sizes over $726,200, add 0.20 percentage points
  • Paid monthly until the loan is paid-in-full or refinanced

30-Year FHA mortgage with a 5 percent down payment

  • 0.50 percent MIP per year, or $500 per $100,000 borrowed
  • For loan sizes over $726,200, add 0.20 percentage points
  • Paid monthly until the loan is paid-in-full or refinanced

30-Year FHA mortgage with a 10 percent down payment

  • 0.50 percent MIP per year, or $500 per $100,000 borrowed
  • For loan sizes over $726,200, add 0.20 percentage points
  • Paid monthly until 132 payments are made, or the loan is refinanced

15-Year FHA mortgage with 10 percent down payment or less

  • 0.40 percent MIP per year, or $400 per $100,000 borrowed
  • For loan sizes over $726,200, add 0.25 percentage points
  • Paid monthly until the loan is paid-in-full or refinanced

15-Year FHA mortgage with more than 10 percent down payment

  • 0.15 percent MIP per year, or $150 per $100,000 borrowed
  • For loan sizes over $726,200, add 0.25 percentage points
  • Paid monthly until 132 payments are made, or the loan is refinanced

15-Year FHA mortgage with more than 22 percent down payment

  • 0.15 percent MIP per year, or $150 per $100,000 borrowed
  • For loan sizes over $726,200, no adjustment required
  • Paid monthly until 132 payments are made, or the loan is refinanced

FHA mortgage insurance premiums differ for FHA refinances, including the FHA Streamline Refinance, and Hawaiian Home Lands and Indian Lands loans.

Click to get FHA mortgage rates now.

Who Qualifies for an FHA Loan?

To qualify for an FHA-insured loan, first-time home buyers and the home they purchase must meet the FHA’s eligibility standards, summarized here:

  • Home buyers must make a down payment of at least 3.5 percent
  • Home buyers must have verifiable income and employment
  • Home buyers may not be delinquent on federal taxes or federal student loans
  • Home buyers may not own another FHA-financed home
  • Homes must be free from lead paint and other habitability standards

The FHA doesn’t enforce a minimum credit score for its mortgage program and makes special provisions for buyers with no credit history or credit score. The FHA directs lenders to look beyond a person’s credit score and find the “bigger picture.”

There are no unique eligibility standards associated with the FHA mortgage program. Home buyers can live in any residential property in any U.S. city.

Buyers don’t need social security numbers, either. Non-permanent resident aliens can use FHA mortgages, as can employees of the World Bank and foreign embassies.

FHA mortgage guidelines are less rigorous than other government-backed mortgage programs, making them ideal loans for first-time buyers. If you’ve gotten turned down for a conventional mortgage or VA loan, FHA financing could help you stop renting and start owning.

Check your FHA eligibility by getting a mortgage pre-approved.

What Are FHA Loan Limits?

The FHA only insures mortgages of up to a specific size. The agency’s upper limits vary by region and are updated annually.

Look up FHA mortgage loan limits where you live.

Nationwide, the 2022 FHA loan limit is $420,680. In areas where the cost of living is higher than typical – such as San Francisco or Brooklyn – FHA loan limits are elevated to as high as $970,800.

In 2023, FHA loan limits increased to $472,030 and $1,089,300 respectively.

FHA loan limits increase for 2-unit and multi-family homes.

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What Are the Different Types of FHA Loans?

The FHA backs purchase loans and refinances for U.S. households. Since insuring its first mortgage in 1933, the agency has built a menu comprised of six different loan types. Each loan type solves a specific home buyer’s need.

1. FHA 203b Loan: Best For Buying A Home

FHA 203b loan is the official government name for the standard FHA-backed mortgage. 203b loans rarely get called by their proper name. Mortgage lenders, real estate agents, and everyone else calls them “FHA loans.”

The FHA 203b loan is the default mortgage option for FHA-backed buyers. It allows for a 3.5 percent down payment, flexible mortgage guidelines, and a low minimum credit score.

Get pre-approved for an FHA loan.

2. FHA 203k Renovation Loan: Best For Buying A Home That Needs Repairs

The FHA’s 203(k) renovation loan is a dual purchase + home improvement loan. It combines mortgage and home renovation costs into a 30-year fixed-rate mortgage with a single monthly payment.

The FHA 203(k) makes home repairs and construction more affordable for FHA-backed borrowers. The program is excellent for:

  • Energy-efficiency improvements, including solar installation
  • Repairing plumbing and electric systems
  • Repairing or replacing a roof or gutters and downspouts
  • Replacing damaged floors
  • Improving landscaping and curb appeal

The FHA 203(k) removes health and safety hazards for ADA compliance.

3. HUD Homes Program: Best For Buying A Foreclosed Home

The FHA is a sub-agency within the U.S. Department of Housing and Urban Development (HUD). In 1968, HUD established a program to sell homes it acquired through foreclosure. The program, known as HUD Homes, sells foreclosed residential properties to the public at steep discounts. 

Down payment requirements vary for buyers of HUD-owned homes. Some require the standard 3.5 percent of an FHA loan. Others allow down payments as low as $100.

Get pre-approved to check your eligibility.

4. Good Neighbor Next Door: Best For Public Service Professionals 

Firefighters, educators, law enforcement officials, and EMTs can purchase HUD homes in low- and moderate-income areas at 50% off their list price through the Good Neighbor Next Door program

Buyers are required to live in their homes for at least three years, except for members of the military who receive clemency for time spent on active duty.

Get pre-approved to check your eligibility.

5. The FHA Streamline Refinance: Best For Refinancing Without Paperwork

The FHA Streamline Refinance is the most straightforward, fastest mortgage refinance available to FHA-backed homeowners. 

It doesn’t require any of the typical verifications associated with mortgage lending:

  • No employment verification
  • No income verification
  • No asset verification
  • No credit score check
  • No home appraisal

To be eligible for the FHA Streamline Refinance, homeowners must show:

  • 6-month history of on-time payments 
  • Proof that the new FHA mortgage will lower their monthly payments by five percent.

The FHA Streamline Refinance is a low-risk loan because it reduces the monthly payment for borrowers who already make on-time payments. In general, the default rate on FHA Streamline Refinances is lower than for FHA loans.

Before qualifying, you must have already completed at least six monthly payments on your existing loan.

6. FHA Cash-Out Refinance: Best For Refinancing To Get Cash 

The FHA cash-out refinance lets homeowners replace their current mortgage with a larger one to convert home equity into spendable cash. 

The FHA cash-out guidelines limit mortgage loan sizes to 80% of a home’s appraised value. Loan sizes must remain within local FHA loan limits. Homeowners may not cash out their refinance within the first 12 months of occupying a home.

7. The LIFT Act: Best For First-Time Home Buyers 

The LIFT Homebuyers Act is a bill that uses FHA mortgages to help renters buy their first home. 

The LIFT Act changes how mortgage payments are structured. Each payment contains more principal than usual, which reduces a homeowner’s balance more quickly. The LIFT Act targets first-time home buyers with FHA-eligible credit scores and low to moderate-income levels.

The LIFT Act has not yet passed into law, but when it is, buyers can use it in conjunction with other first-time home buyer programs like the First-Time Home Buyer Tax Credit of 2021 and the Downpayment Toward Equity Act of 2021. 

Get pre-approved to check your eligibility.

FHA loans should not be the default mortgage choice for first-time home buyers. If buyers have average credit scores or better, they should consider conventional home loans instead.

Comparing FHA Loans vs. Conventional Loans

Conventional home loans are loans backed by one of two other government mortgage agencies, Fannie Mae and Freddie Mac. 

Conventional mortgages differ from FHA loans because the government does not insure them. Conventional mortgages are backed by Wall Street and adhere to the most general of mortgage standards, so it’s no surprise that 82% of home buyers use conventional mortgage financing.

Conventional mortgage loans allow for more fixed-rate mortgage terms than FHA or USDA loans. They also allow more adjustable-rate mortgage terms. Home buyers can choose a 10-, 15-, 20, or 30-year fixed-rate mortgage; or a 3-, 5-, 7-, or 10-year adjustable-rate term.

There are also multiple three-percent down, low down payment mortgages available through conventional mortgage financing:

  1. Conventional 97
  2. The HomeReady Mortgage
  3. The Home Possible Mortgage

Here’s a comparison:

FHA LoanConventional Loan
Minimum 3.5% down paymentMinimum 3% down payments
No credit score requirementsMinimum credit score threshold
Mortgage insurance mandatoryMortgage insurance requirements based on down payment percentage
$420,680 for loan limit for a 1-unit residence$647,200 loan limit for a 1-unit residence
Primary residencePrimary, second, and non-owner occupancy allowed

What’s the Difference Between FHA vs. USDA Loans?

Since its start in 1934, the FHA program has supported affordable homeownership. The success of the FHA led to the creation of another government-backed mortgage program: the USDA loan.

USDA loans are mortgage loans backed by the U.S. Department of Agriculture to promote home affordability in suburban and rural census tracts.

USDA loans are 100% mortgages that require no down payment.s compared to FHA mortgage guidelines, USDA guidelines are more restrictive.

  • USDA loans require a 580 credit score or higher
  • USDA loans are limited to single-family homes
  • USDA loans impose maximum income limits on homeowners

Additionally, USDA loans are only available to home buyers in low-density census tracts, as defined in this USDA eligibility map. 91% of the United States is USDA mortgage-eligible.

Here is a more detailed look at the differences between FHA loans and USDA loans:

Homes everywhereHomes in less-dense areas
3.5 percent down paymentNo down payment required
No credit score minimumLow credit score minimum
No income limitationsModerate income limitations
Maximum loan size limitationsNo maximum loan size

Learn more about USDA loans.

How Can First-Time Buyers Apply for an FHA Loan?

First-time home buyers can apply for FHA loans online at a lender’s website or in person at a bank branch. 

Nearly 600,000 first-time buyers get FHA-approved each year. Complete applications require a credit score check and proof of income and employment.

Most mortgage lenders are FHA-approved and offer a complete suite of FHA-endorsed products, including the 30-year mortgage and the FHA 203k home construction loan. 

1. Select a Mortgage Company

Mortgage lenders must be FHA-licensed to make an FHA-backed loan. 

The FHA maintains a searchable list of FHA-approved lenders on its website and a list of lenders whose licenses were revoked.

Home buyers can find FHA-approved lenders on the government website or search for approved FHA lenders online. Lenders that advertise FHA mortgage rates in a rate table are FHA-approved by law.

Buyers should select at least two FHA-approved lenders for comparison reasons.

2. Apply For Your FHA-Endorsed Mortgage

The FHA loan application resembles other mortgage applications. 

Buyers should expect to verify income, assets, and employment with their selected lenders. They should submit to have their credit scores verified to ensure FHA eligibility.

Buyers can get an FHA pre-approval based on their application. 

However, binding FHA mortgage approvals require the buyer to purchase a home and commission an FHA-certified home inspection.

FHA home inspections verify that a property is:

  • Free from lead paint
  • HVAC-, plumbing-, and electric-compliant 
  • Habitable and safe for humans

FHA applications are manually-reviewed and may take longer to approve than other mortgage loan types. 

3. Compare FHA Loan Estimates From Two or More Lenders 

Applying for an FHA mortgage takes time. Applying for two FHA mortgages takes more time – and it’s worth it!

Research from Freddie Mac shows that when a home buyer gets two or more mortgage quotes, they save $1,500 over the life of their loan. Some home buyers save more.

FHA loan interest rates frequently change, so don’t let time elapse between comparisons. Look at loan costs, interest rates, and processing fees. Even a small amount of savings adds up long-term.

Also, if you’re eligible for downpayment assistance or cash grants for a down payment, notify your lender.

Get pre-approved for an FHA loan now.

Frequently Asked Questions About FHA Loans

Are FHA loans available in all 50 states?

Since 1934, the FHA and its mortgage program have made homeownership affordable in all 50 states. FHA loan rules are inclusive and forgiving and contain protections not found in other mortgage loans. 

Can I use a cash gift as a down payment with an FHA loan?

Yes. The FHA is the only government agency that allows a home buyer’s entire down payment to come in the form of a gift. 

It’s also the only agency that lets cash gifts come from a friend. Some home buyers add down payment cash to their wedding and baby shower registries.

Are FHA mortgages assumable?

Yes, FHA mortgages are assumable, which means that your home’s future buyer can purchase your mortgage from you along with your home too. Assumable mortgages make your home more affordable to others after mortgage rates rise. You can sell your 4% mortgage rate in a 10% mortgage rate market.  

Can I refinance an FHA mortgage?

Yes. FHA-backed homeowners get access to the FHA Streamline Refinance – the fastest, easiest way to lower your mortgage rate. When mortgage rates are down, homeowners can switch to lower-rate mortgages irrespective of their work status, money in the bank, or credit score. You don’t even need a home appraisal.

Do I need a larger down payment when using an FHA for a multi-unit property?

No. Unlike conventional mortgages, FHA mortgages don’t require home buyers to make a larger down payment or accept a higher interest when buying a 2-4 unit property. FHA mortgages allow 3.5 percent down regardless of property type. 

Can I negotiate closing costs with home sellers?

Yes, the FHA allows home buyers to negotiate with home sellers to contribute up to 6 percent of the purchase price toward closing costs, or $6,000 per $100,000. These are known as seller concessions and can get applied to real estate fees, loan costs, state and local taxes, and the cost of title insurance.

Our Advice – Consider an FHA loan if you haven’t already 

Since 1933, the FHA 203b loans have made homeownership more affordable and accessible to Americans in all 50 states – it’s the original low-down-payment loan.

To check whether the FHA mortgage is best for you, start a pre-approval with Homebuyer and let a mortgage guide help you put your best foot forward.

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