Oftentimes, prospective home buyers are unable to buy homes not because they can't afford the monthly mortgage payments, but rather because of how expensive down payments and closing costs are.
Thankfully, the U.S government has taken actions to remedy some of this.
One such option for first time home buyers is the FHA loan program.
What are FHA mortgages?
FHA loans are a special type of home loan. Insured by the United States Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, FHA loans are powerful and can really help first time home buyers to get into homes earlier in life.
FHA home loans have lower down payment requirements than most other type of home loan programs, and they also carry lower credit score requirements.
In exchange for taking on the extra risk that you pose as a borrower (since you won't have much equity in your home), you'll be on the hook to pay mortgage insurance premiums. Depending on where you buy your home, you will be subject to loan limits, which vary across states with vastly different housing costs.
FHA loan program specifics
So what sets FHA mortgages apart from Conventional and other types of loans? Pretty much all of the factors I just touched upon!
For starters, you have vastly different:
Down payment requirements
Credit requirements
Mandated mortgage insurance premiums
Loan limits
Let's take these items one by one.
1. Down payment requirements
Typically, you won't be able to take out a Conventional mortgage loan unless you are willing and able to come up with a minimum 10% down payment. Even then, you'll need to pay PMI - private mortgage insurance - until you hit at an LTV between 78-80%, which can take years to do.
With a loan through the Federal Housing Administration, you'll be able to get home financing with a down payment as little as 3.5% of the purchase price of the home.
2. Credit score requirements
Buying a home is probably the hardest credit approval process you'll go through in your life. After all, you are likely to be borrowing at least $200,000 in most instances, so it is important for lenders to do their due diligence before lending you that money.
Most Conventional mortgage lenders require credit scores of at least 650-680, and even then, you will be far off from qualifying for the best interest rates offered.
To truly be competitive with a Conventional mortgage application and approval, I typically recommend that my readers have credit scores of at least 720.
This is not the case with FHA home loans.
Under the guidelines of the FHA mortgage process, you could be approved for a home loan with a credit score of 500, though some participating lenders may require a down payment larger than 3.5% for those with credit scores below 580.
And while other lenders may set requirements over 580, FHA mortgage loans are still likely to be the best option for those with below average credit.
3. Mortgage insurance premiums
One of the only downsides of the FHA loan program is those mortgage insurance premium payments you'll need to make.
The good news is that these premiums are not too much unlike the PMI you'd pay on a Conventional mortgage anyway.
But with the Federal Housing Administration program, you'll actually have to pay two separate MIPs.
The first will come up when you close on your home. At this time, you'll be expected to make a payment worth 1.75% of your total loan amount, which is something you'll need to prepare for financially. Some buyers, though, opt to roll this expense into their home financing.
In addition to this upfront mortgage insurance premium, you'll encounter another (lesser) MIP each month as a term of the FHA program.
4. Loan limits
Remember - since the FHA program is predominantly intended to spur first time homeownership, you will be limited in how much you can finance.
In 2023, these limits range from $472,000 to $1,089,300 for single family homes in the contiguous United States. Duplexes and other housing structures may carry higher limits, as do homes in Alaska, Hawaii, and Puerto Rico.
It is also important to mention that these financing limits vary by county and are not consistent across an entire state. Depending on the cost of living in different parts of a state, like Florida for instance, not all counties in a state have the same FHA loan limits.
FHA mortgage loan eligibility
Generally, FHA loans are used by first-time home buyers, but this is not always the case. In order to be eligible to take a loan through the FHA program, prospective borrowers must have/be:
Documented steady income and can provide proof of employment
A debt-to-income ratio no higher than 43% and ideally much lower: No more than $21,500 in debt for every $50,000 in income
Purchasing a home to serve as a primary residence: Vacation homes and rental properties are not eligible
A credit score of at least 500, and ideally above 580 to have a minimal down payment
Related: Get our debt-to-income worksheet
Is an FHA loan right for you as a first-time buyer?
I'm asked all the time who Federal Housing Administration loans are right for. In my opinion, they can be a solid option for those with stable jobs that fall in love with a house and don't have the savings to make a 10-20% down payment.
Additionally, I recommend that you consider FHA loans if you have sizable amounts of debt such as student loans, rather than consumer debts such as credit card debt.
You'll always want to be wary of taking on more debt than you may be able to handle, but if you have a college degree and a good career, these risks can be limited somewhat. One exception to this is if you are a doctor, lawyer, or white collar financial professional. In these instances, you may qualify for different mortgage programs, such as physician mortgages or lawyer home loans.
How to get an FHA loan as a first-time buyer
Getting an FHA mortgage is a little different from the traditional experience, but it doesn't have to be any more difficult. In fact, you'll just want to follow these five steps:
Find a house you want to buy
Contact FHA approved lenders
Gather documents and complete applications
Compare rate offers
Pick a lender and close
1. Find a qualifying home
Before you can worry about financing your new home, you'll need to find a home that you want to buy.
There is a caveat to this strategy, however.
I recommend that you consider getting preapproved for an FHA loan as you begin to search for homes in your area.
This way, potential sellers will understand that you are a serious buyer and will likely be able to close on the home more quickly. It will also help you assure that you're searching for homes in a price range where you know you'll be able to secure a loan through the FHA program.
2. FHA pre-approval process
If you decide to begin the pre-approval process, you'll need to be prepared to provide A LOT of financial information to prospective lenders.
As a starting point, you'll likely be asked for:
Paystubs
Two years of tax returns
Two years of W2 forms
Information about recent employer(s)
Business income and tax forms, if self-employed
Of course, each situation is different, and you may be asked for more information than what is listed here.
3. Find an FHA approved lender
If you haven't already gotten pre-approved, you'll need to find an FHA approved lender before you can officially buy a home.
Remember - the FHA loan program was created by the United States government, though they do not directly offer home loans.
National FHA lenders
The nature of the FHA loan program is such that most of the mortgage lenders out there do offer these loans. This means that you likely can choose whether you want to work with a national lender, credit union, or local community bank.
Since it would be impossible to cover all of the local options across the entire country, I thought I would mention some of the United States' most popular FHA lenders on the market right now.
These lenders include:
Rocket Mortgage
Quicken Loans
New American Funding
Whether or not you work with a local lender should depend on the interest rate you get and your personal preferences. At this stage, even if you are pre-approved, it is okay to consider multiple different lenders.
4. Compare rate offers
Once you've narrowed down your options to a few lenders, your next step will be to formally complete your application(s) and fulfill the rest of the requirements you'll need in order to close on your loan.
Once you've completed your application(s), your prospective lenders will formally be able to offer you an interest rate and loan.
I recommend that you pick the lowest interest rate this is offered to you, since it will mean lower payments each month, which is important given the FHA program's mortgage insurance premiums.
Once you've reviewed the offers, it will be time to make your decision!
5. Pick a lender and close
With your decision made, your focus will turn to fulfilling all the obligations you need in order to close on your FHA loan. This includes things like your:
Home inspection
Homeowner's insurance policy
Title search
Surveying
Other incidentals
After you've met these requirements, your lender will issue what is known as a "clear to close, at which point you'll be able to schedule a date to officially close and take ownership of your new home!
Can you refinance an FHA loan?
Yes, you can. Those looking to refinance an existing FHA mortgage actually have five different options, so it can get a little confusing.
Your five options include:
Streamline refinancing
Simple refinancing
Cash-out refinancing
203(k) refinancing
Conventional refinancing
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