FHA Loans for First Time Home Buyers

FHA Loans are a popular choice with many first time buyers.  FHA loans remain easier to get and offer some advantages in comparison to conventional mortgages. As long as you do not have an existing FHA mortgage and you meet the following minimum requirements, you can expect to be approved for an FHA loan. 

Review the FHA requirements to find out an FHA Loan is the right option for your first home purchase:

Credit

FHA loans offer lenient credit requirements. For example, the FHA typically understands of personal situations. Certain blemishes to your credit report will be ignored without requiring an explanation. In general, expect the FHA to look at overarching trends rather than focusing on individual issues.

If you have declared bankruptcy, you can qualify for an FHA loan two years after the discharge date. If you had a distinct period of time when you had late payments but have had a consistently good payment history following that time, the FHA will overlook this imperfection. Collections are not a factor.

However, you will not be eligible for an FHA loan if you have any federal liens, such as tax liens or defaults on student loans.

Your credit score must be a minimum of 620 when putting down the minimum down payment of three percent. In contrast, conventional loans require a minimum credit score of 720 to qualify for prime rates.

Down Payment

The biggest advantage FHA loans have over conventional loans is that home buyers need minimal cash at closing. Typical first time home buyers do not have enough savings to pay 20 percent down plus closing costs. The FHA requires just 3 percent of the loan value be paid down at closing. 

A portion of these funds may be gifted by a family member. FHA loans also allow the seller to pay up to 6 percent of the closing costs. Due to these lenient down payment requirements, FHA loans comprise one of the best first time home buyer programs.

FHA Rates

FHA loans offer extremely competitive mortgage rates, which translates to a lower monthly mortgage payment. By having a lower interest rate, a borrower can pay less throughout the life of the loan. The FHA often offers lower rates than even a traditional 30-year fixed loan.

FHA Application Process

The FHA is lenient in deciding who they will lend to. If you meet the credit requirements and have the minimum required 3 percent down payment and steady employment, it is likely that you will be approved for an FHA loan. Typically, the FHA application process is easier than that for a conventional loan.

Debt to Income

The FHA permits borrowers to have a higher debt-to-income ratio than other loan programs. For example, if you have a car loan, student loans and credit cards, you can still qualify for an FHA loan. If you feel you can afford the monthly mortgage payment, the FHA permits a 50% debt-to-income ratio. 

This number is calculated by adding up your debt, including the proposed monthly mortgage payment, and dividing it by your monthly income to determine a percentage.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.