Best mortgage lenders for first-time buyers
Buying your first home? Check out Rocket, Better, New American Funding and more of our top lender picks. Plus, get answers to mortgage questions.
Kathryn Parkman
An FHA loan is a specific type of mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration. The primary purpose of this type of loan is to help individuals with lower credit scores or lower down payments qualify for borrowing. Because they have looser requirements than conventional loans, FHA loans are especially attractive among first-time buyers, but you don’t have to be a first-time homebuyer to get one.
The biggest advantage of an FHA loan is the flexible qualification requirements. You can have a credit score as low as 500 — lower than most conventional loans — and still be eligible. You can also make a down payment of as little as 3.5% (as long as your credit score is at least 580), which is helpful if you don’t have a huge amount of savings, don’t have equity from a previous home sale or want to keep more money in your pocket.
FHA loans are also available more quickly after adverse credit events than other loans. For example, the waiting period to obtain an FHA loan after a Chapter 7 bankruptcy is two years; for a conventional loan, it’s four years.
Mortgage insurance is mandatory on all FHA loans.
FHA loan limits are lower than for conventional loans, which limits how much home you can afford. Low-cost area mortgage limits are set at 65% of the national conforming limit of $548,250, so the limit on a one-unit property for an FHA mortgage is $356,362 in 2021.
Both the FHA and conventional loan limit in high-cost areas is 150% of the conforming loan limit, or $822,375. You can search FHA mortgage limits by location on the Department of Housing and Urban Development website.
Another downside of FHA loans is having to pay mortgage insurance premiums. FHA loans have an upfront mortgage insurance cost that you pay at closing — you can also roll it into your loan) — and a monthly amount that’s included with each mortgage payment.
You pay the mortgage insurance premium for the life of the loan, unless you make a down payment of at least 10%, in which case you make payments for 11 years.
The FHA regulates and insures FHA loans, but you get an FHA loan from a private, FHA-approved lender. Lenders can differ slightly in some of their requirements.
Lenders consider several factors when determining your interest rate.
There’s no income requirement for an FHA loan, but the lender will require you to show proof of stable employment. The property you are seeking a loan for must meet FHA property standards, and you must plan for the home to be your primary residence.
The FHA insures many different types of loans. Some of the most common include the following:
HUD recommends asking an FHA-approved lender for information about FHA loan products or talking to a HUD-approved housing counselor.
Whether an FHA loan is right for you will depend on your specific situation. According to the Consumer Financial Protection Bureau, for borrowers with fair or poor credit scores or less money for a down payment, FHA loans are normally less expensive than conventional loans.
On the other hand, if you have good credit and at least 10% for a down payment, an FHA loan may be more expensive than a conventional loan. If you are considering an FHA loan, make sure you check offers from multiple lenders. Remember that the FHA sets minimum eligibility standards, but each lender has its own specific approval requirements, rates and fees.
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