How to get an FHA first-time homebuyer loan

Published December 10, 2021
by Better

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What You’ll Learn

Who’s considered a first-time homebuyer and how to qualify for an FHA loan

The financial considerations of buying your first home

Tax benefits of being a first-time homebuyer

First time homebuyers considering an FHA loan

The Federal Housing Administration insures FHA loans to make homeownership more accessible for all Americans. This enables approved lenders to offer FHA loans to homebuyers with lower than average credit scores. If you want to buy a home now but have a lower credit score and don’t have the cash for a 20% down payment, an FHA home loan could be the right mortgage for you.

Getting a first time homebuyers loan

If your name hasn’t been on a title for a residential property in the US during the last 3 years, you may qualify for a first-time homebuyer loan. Suppose your name was on the mortgage for a property but not the title. In that case, you might still be eligible for a first-time homebuyer’s loan with Better Mortgage.

Here are some example scenarios where people would be considered first-time homebuyers:

  • You have never had your name on the title of a property
  • Your name was on the title and mortgage of a property, but you sold the home 4 years ago
  • Your name was on the mortgage of a property within the last 3 years, but it wasn’t on the title

If your name was on the property's title within the last 3 years, but you did not add your name to the mortgage, you are not considered a first-time homebuyer.

FHA home loan qualifications and requirements

FHA home loans are specifically designed for borrowers with lower credit scores and smaller down payments.
The higher your credit score, the lower the down payment you’ll be able to make. While the Federal Housing Authority sets the minimum qualifying guidelines for homebuyers, approved FHA lenders may require higher credit scores.

FICO® credit score Minimum down payment Debt-to-income ratio (DTI)
>580 to qualify for an FHA loan through Better Mortgage 3.5% <43%
>580 FHA minimum qualifying credit score 3.5% <43%
570–500 FHA minimum qualifying credit score 10% <43%

To qualify for an FHA loan, homebuyers also need to spend less than 43% of their income on recurring debt payments. This balance between debt payments and income is known as your debt-to-income ratio (DTI). Lenders (and the FHA) prefer borrowers with lower DTIs because they’ll be more likely to pay off their loan.

First time homebuyer down payment: What it means for your monthly payments

The bigger your down payment, the lower your mortgage payments will be each month. This is because you won’t need to borrow so much. For example, say you’re buying a house that costs $400,000. With a 3.5% down payment of $14,000, your loan amount will be $386,000, plus interest. If you put 10% down instead, your down payment would be $40,000, and your loan amount will be $360,000, plus interest.

Lenders that offer FHA loans charge borrowers a mortgage insurance premium, known as MIP, to protect them against the risk of the borrower defaulting on the loan. If you make a down payment of 10% or more, your lender should cancel MIP after 11 years. If you make a down payment of less than 10% of the home’s purchase price, you’ll need to pay MIP for the life of the mortgage.

First time homebuyer credit score: How it affects your interest rate

A higher credit score shows lenders that you have a history of successfully managing and paying off debt. When your credit score goes up, lenders will be more likely to offer you lower interest rates because they see your loan as less of a risk. FHA loans make homeownership available to borrowers with significantly lower credit scores, which traditionally means there would be a higher risk that the borrower could miss a payment or default on the loan. The FHA balances this risk by requiring borrowers with the lowest credit scores to make larger down payments. That’s why you’ll see the minimum down payments for FHA loans range from 3.5% to 10% of the home’s purchase price.

First time homebuyer insurance: Why it’s essential and what kind you need

There are 3 kinds of insurance a first-time homebuyer with an FHA loan needs.

  1. MIP: the monthly insurance premium the lender charges for your loan.
  2. Title insurance: this protects the lender from any issues with the title to your property. It’s a one-off charge that’s added to your closing costs.
  3. Homeowners insurance: lenders require this insurance to protect the property against damage. Many lenders require homeowners insurance payments to be bundled with your monthly mortgage payment to ensure you stay current with your mortgage payments. That means the lender will collect your homeowners insurance premium and pay it to your insurer on your behalf.

Qualifications to buy a house

You’ll typically need to meet the following requirements to qualify for an FHA loan:

  • Stable employment history, ideally of at least 2 years with the same employer
  • Stable or increasing income over the past 2 years
  • Less than 2 30-day-late payments in the past 2 years on your credit report
  • Any bankruptcy on your credit record should be at least 2 years old, and have good credit for the 2 consecutive years following the bankruptcy
  • Your mortgage payment should be roughly 30% or less of your total monthly gross income
  • You meet all the financial criteria from the FHA home loan qualifications section of this article

Of course, all of these qualifications are in addition to the financial requirements outlined in the section titled, ‘FHA home loan qualifications and requirements.’

Financial considerations for purchasing your first home

Buying a home means you’ll need to pay for more than just the down payment and the monthly mortgage bills. You’ll also have to pay closing costs and have money set aside for the ongoing maintenance costs of your home.

Closing costs are the fees, taxes, insurance, and administrative costs of buying a home. Better Mortgage doesn’t charge lender fees, but many lenders charge a range of fees to cover loan origination, underwriting, and loan officer commission. There are other fees that are unavoidable because they pay for 3rd party services such as credit reports, home appraisals, flood certification, and title fees. However, you can shop around for some services such as home insurance, pest/termite inspection, and title services. For a deeper dive into what costs to expect, read 'What’s included in closing costs.'

When you own a home, you’re responsible for all the upkeep and ongoing maintenance. If a heater breaks down in the winter, it’s on you to fix it. If the roof starts to leak, you need to find someone to repair it. These expenses, and anything else that needs to be repaired, replaced, or simply maintained costs money you want to have set aside for emergencies.

A good rule of thumb is to save between 1%–3% of the cost of your home for repairs and maintenance. It’s also wise to have enough money saved to cover at least 3 to 6 months of your mortgage and living costs in case you lose your job.

First home buyer benefits

As a first-time homebuyer you qualify for penalty-free IRA withdrawals of up to $10,000. Typically a 10% penalty is applied when you’re younger than 59½, and you make a withdrawal from a traditional IRA. If you plan to use that money to buy your first home, this 10% fee doesn’t apply.

To help lower-income families afford homeownership, some states, and local housing finance agencies offer a mortgage credit certificate (MCC) program. These enable first-time homebuyers to claim a dollar-for-dollar tax credit up to $2,000 for a portion of the mortgage interest they pay each year.

As a homeowner, you’ll also qualify for a range of additional tax deductions. These tax deductions include mortgage interest, property taxes, and mortgage insurance (MIP). This article goes into all the details of homeowner tax deductions and how to apply for them.

FHA pre-approval steps

With Better Mortgage, your FHA loan pre-approval takes as little as 3 minutes. First, we’ll ask a few questions about your income, assets, and current property information. Next, we’ll do a soft credit check which won’t impact your credit score. Then Better Mortgage will match you with all the mortgage options you qualify for. Our Home Advisors will talk you through your options to help you determine if an FHA loan is best for you.

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