Last Updated on August 24, 2023 by Eric Jeanette
FHA First Time Home Buyer Loan Options
FHA loans are extremely popular for first time home buyers due to the low down payment and flexible credit score requirements. Over 25% of new mortgages today are FHA loans and virtually every lender offers FHA loans.
FHA first time home buyer loans are easy to qualify for if you follow some simple steps:
- Save for the required down payment of 3.5%
- Monitor and improve your credit if needed
- Maintain a steady 2 year work history with stable income
- Avoid filing for bankruptcy
- Meet with an FHA lender early to develop a plan
Why FHA Loans are Perfect for First Time Home Buyers
FHA loans are perfect for first time home buyers for various reasons.
Low Down Payment Requirement – Young first time home buyers often have not saved very much to purchase their first home. The low down payment requirement is often the deciding factor in their ability to purchase a home.
Low Credit Score Requirement – FHA loans have flexible credit score requirements. This is also important in today’s environment where poor credit is becoming very common.
How First Time Home Buyers Qualify for an FHA Loan
First time home buyers should focus on the following areas months before attempting to qualify for an FHA Loan:
- Focus on saving for a down payment – the funds need to be in your account for at least two months
- Improve your credit score – Your interest rate is tied to your credit score
- Fix any errors on your credit report
- Be sure to have steady employment and income for at least two years
- Do not file for bankruptcy if you are struggling financially
If you focus on these items, you will have a good shot at qualifying for an FHA loan. We suggest speaking with a lender now to see what you need to work on and to develop a game plan.
FHA First Time Home Buyer Credit Score Requirements
The credit score requirements for an FHA loan are extremely lenient. FHA guidelines permit credit scores as low as 500. However, here are a few stipulations you will need to keep in mind:
- If your credit score is below 580, then a 10% down payment will be required
- FHA lenders have the options to establish their own credit score minimums. While the FHA permits a score of 500, some lenders impose minimums of 600 or higher.
For more information, please read our article on FHA credit score requirements.
Preparing to Buy Your First Home with an FHA Loan
These are just a few tips on what you can do to prepare to purchase your first home with an FHA loan.
- Meet with a lender well in advance
- Improve your credit
- Save for a down payment
- Identify an area or neighborhood
- Find a reputable real estate agent
We also suggest reading our article on how to get pre approved for an FHA loan.
Establish a Budget
If you are thinking about buying a home sometime in the future, then you should establish a budget well in advance. If you find you are not able to come up with the funds to purchase the home, then you may need to consider waiting until you do or reducing the cost of the home.
Down payment – Your minimum down payment requirement for an FHA loan will be 3.5%. However, if your credit score is below 580, then the down payment will be 10%. These are basic guidelines that are set by the FHA. You also can receive gift funds from a relative to pay for your down payment and closing costs.
Closing costs – Another expense to budget for are closing costs. You should plan on saving anywhere from 2%-5% of the purchase price for closing costs. The percentages will likely depend upon the size of the loan. The seller can also contribute up to 6% to cover closing costs for you. We suggest reading our article on FHA closing costs where you can get a full list of all closing costs and an estimate.
Reserves – Lenders will also be looking for some cash reserves to be remaining after your loan closes. They do not want you to use every penny to purchase the home, but then have nothing left over for additional expenses or emergencies. As a result, plan on having at least 3 months of additional mortgage payments set aside as cash reserves.
If you need help determining a budget, one of our FHA lenders can help put that together for you. They will review your FHA first time home buyer mortgage options.
First Time Home Buyer Down Payment Requirements and Solutions
We touched on the FHA down payment requirements above so you already know about the 3.5% requirement.
Gift Funds – You may receive gift funds from a relative or close friend to cover part or all of your down payment. If there are dollars left over, they may also cover a portion of your closing costs. The lender will require the gift donor to sign a “gift letter” indicating the funds are a gift and there is no expectation of repayment. We suggest reading our article on FHA gift funds for more information.
Gift of Equity – A gift of equity is different than gift funds. A gift of equity can occur when you are purchasing the home from a relative. In this situation, you establish a purchase price and the lender will permit a credit towards the down payment which will not be collected at closing. For example, if your mother is selling her home for $100,000, she can gift you the 3.5% ($3,500). This means at the closing table she will only receive $96,500 for the home.
Down payment assistance – There are various down payment assistance programs or grants available in each state. When it comes to down payment assistance, the lenders most likely are not going to research and manage that for you. The borrowers are required to find the down payment assistance, apply for it and then bring that to the lender as the source for down payment funds. We suggest reading our article on FHA down payment assistance. There we list some options in each state.
Documentation Needed for an FHA First Time Home Buyer Loan
There are some basic documentation needs for an FHA loan. You can expect every lender to collect the following documents:
- Recent pay stubs, W2’s and Tax Returns
- 2 months of bank statements
- Last quarter’s statement for stocks, 401k and other investments
- Valid ID
- Copy of the sales contract if the transaction is a purchase
- Copy of the current mortgage statement and deed for refinances
- Copy of homeowner’s insurance binder before closing
These are just the basics and you can expect your FHA lender to ask for a few other things depending upon your scenario.
4 Tips on How to Afford a More Expensive Home
There are ways to buy a more expensive home without increasing your income. These are just some basic tips based upon an understanding of the FHA guidelines and basic math. Some of these ideas may not be intuitive for first time home buyers.
- Search for a home with lower taxes – Property taxes have a significant impact on your buying power. They count towards your debt to income ratio and reduce the amount you can qualify for. For example, using a mortgage rate of 4%, every $500 of property taxes you can save will increase your loan amount potential by $100,000.
- Reduce your consumer debt – The minimum payment requirements that appear on your credit report also impact the amount you can qualify for. This includes credit cards, car payments and anything else other than mortgages which may appear on your credit report. The math is the same as what you see above. For every $500 in monthly payments that you reduce, your buying power increases by about $100,000.
- Increase down payment funds – For some people, the qualifying income is not a problem but they lack the down payment funds needed. Finding more money for a down payment will then increase your buying power if you have the income to support it. For every $3,500 in additional down payment funds, you may qualify for another $100,000.
- Add a co-borrower – Another options although not recommended is to add a co-borrower. FHA guidelines have rules about occupying and non-occupying co-borrowers that you should be familiar with. However, adding a co-borrower can help bring additional income to the application which means you may qualify for a more expensive home.
Keep in mind that the co-borrower’s debt also is added to the calculations. Plus, the lender will use the lowest credit score of the two borrowers. Therefore, if the co-borrower’s credit is bad it can create a negative scenario for you and likely will also result in a higher interest rate.
FHA First Time Home Buyer – Frequently Asked Questions
How much income is needed to qualify for an FHA loan?
There is no set about of income that is needed for an FHA loan. What lenders will be looking for is a maximum debt to income ratio of 43% with some FHA lenders allowing up to 50%. The amount of income needed will be based upon the size of the loan combined with the other monthly expenses that appear on your credit report.
Are there special mortgage rates for first time home buyers?
There is a myth that there are special rates or even programs for first time home buyers. In reality, everyone has the same benefit and access to the same rates regardless as to whether they are first time home buyers or purchasing their third home.
Can I build a home using an FHA loan?
First time home buyers can build a home using an FHA loan. This is actually a really good program as it is a one-time close program. With just one loan, you can finance the purchase of the lot, pay for all construction costs and your final loan. We suggest reading our article on FHA construction loans.
Can I buy a mobile home with an FHA loan?
Mobile home financing is available through the FHA. However, not all lenders participate in financing mobile homes. You can read more about FHA mobile home loans here.
Should first time home buyers get pre-approved?
Every potential home buyer should get pre-approved, not just first time home buyers. Most realtors will not schedule appointments to see homes without knowing you can afford to purchase the home. We suggest reading our article on getting an FHA pre-approval.