13 Questions First-Time Home Buyers Ask About FHA Loans

The 2024 FHA Loan Handbook

FHA loans are a popular financing option among first-time home buyers United States. This program is not limited to first-time buyers. But it has several important features that attract this particular group, such as a low down payment option.

Over the years, we have fielded countless questions from first-time home buyers relating to the FHA mortgage loan program. This guide compiles some of the most frequently asked questions, with straightforward answers from HBI’s mortgage experts.

Questions answered in this guide:
1. What is an FHA loan?
2. How are they different from conventional loans?
3. What are the benefits of using an FHA loan?
4. Are they only for first-time buyers?
5. Is it a good option for first-time buyers?
6. How much will I be able to borrow?
7. What’s the minimum down payment?
8. Does the FHA offer down payment assistance?
9. Can a relative give me money for the down payment?
10. Do I need good credit to qualify?
11. Are there any disadvantages for first-time buyers?
12. How do I apply for the program?
13. What types of homes can I buy with an FHA loan?

Note: This guide follows a logical sequence, with each question building on the information that precedes it. We recommend that you read (or at least skim) the questions in order.

1. What is an FHA loan?

An “FHA loan” is a mortgage loan that gets insured by the Federal Housing Administration, a government agency. This insurance protects the mortgage lender from losses that occur when a borrower defaults, or fails to repay the loan.

An FHA home loan is like any other type of residential mortgage loan, but with one major distinction. It is insured by the federal government, through the Federal Housing Administration (FHA).

The FHA is part of the Department of Housing and Urban Development (HUD), which you’ve probably heard of before. So it’s HUD that sets all of the rules and requirements for this program, which we will explore throughout this Q&A guide.

2. How are they different from conventional loans?

In the mortgage industry, the term “conventional” is used to describe any mortgage loan that is not insured or guaranteed by the government. This label distinguishes it from the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loan programs, which do receive government backing.

As the Consumer Financial Protection Bureau explains it: “Conventional just means that the loan is not part of a specific government program. Conventional loans typically cost less than FHA loans but can be more difficult to get.”

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3. What are the benefits for first-time buyers?

FHA home loans offer a number of benefits for first-time buyers in particular. For one thing, borrowers can make a down payment as low as 3.5% of the purchase price. This is an appealing feature for borrowers who don’t have a lot of money saved up for a down payment.

Infographic showing why first-time buyers like FHA loans

FHA loans can also be easier to obtain when compared to a conventional mortgage (that’s not backed by the government). We’ve already stated the reason for this.

Lenders who offer FHA mortgage loans receive additional protection from borrower default, in the form of government insurance. So those lenders can offer relaxed requirements for borrowers.

4. Is this program only for first-time home buyers?

No, you do not have to be a first-time home buyer to qualify for an FHA loan.

Many people believe that the Federal Housing Administration loan program is only for first-time buyers. This is a common and unfortunate misconception. The truth is that anyone who meets the minimum requirements for this program can qualify.

However, most of the borrowers who use FHA loans are first-time home buyers.

According to the Department of Housing and Urban Development’s report to Congress for 2023: “FHA served more than 478,000 first-time homebuyers, 82 percent of its forward mortgage purchase volume.”

5. Are FHA loans a good option for first-time buyers?

In the right situation, FHA loans can be a great option for first-time home buyers. This program is particularly well-suited for those with limited down payment funds and/or credit-related issues in the past.

But there are also situations where a first-time home buyer might be better off using a different mortgage option, such as a conventional or VA mortgage.

Here are two examples where an FHA loan might not be the best option:

Bigger down payment: If a first-time home buyer can make a down payment of 20% or more, a conventional loan might be the better option. In this scenario, the borrower would not have to pay for mortgage insurance. FHA loans, on the other hand, always require borrowers to pay for mortgage insurance.

VA loan eligibility: If the first-time home buyer is a military member or veteran, a VA loan might be the best option. The VA program allows eligible borrowers to buy a house with no down payment whatsoever, while avoiding mortgage insurance at the same time.

First-time buyers who use FHA loans often have one or more of the following:

  • Lower credit scores
  • Limited savings for a down payment
  • Higher debt-to-income ratios
  • Less established credit history

6. How much will I be able to borrow?

When buying your first home with an FHA loan, the maximum amount you can borrow will largely depend on: (1) your debt-to-income ratio, and (2) the official FHA loan limit for your particular county.

The debt-to-income (DTI) ratio compares the amount of money you earn each month to the amount you spend on your various recurring debts. FHA’s maximum DTI ratios for most borrowers are 31% and 43%.

This means the monthly housing payments should not exceed 31% of gross monthly income, while the total debt burden should not exceed 43% of monthly income. But exceptions can be made for some borrowers.

FHA loan limits also play a role here. The Federal Housing Administration will only insure mortgage loans up to a certain amount. This amount can vary from one county to the next.

In 2024, FHA loan limits range from $498,257 to $1,149,825 for a one-unit residential home, depending on the county. You can find the limits for your area on the HUD.gov site.

In a high-cost real estate market like San Francisco or Washington, D.C., an FHA loan might limit a first-time home buyer’s options, forcing you to consider less expensive properties or make a larger down payment.

7. What’s the minimum down payment?

All borrowers who use an FHA loan to buy a home must make a down payment of at least 3.5% of the purchase price or appraised value. This applies to repeat and first-time home buyers alike.

When it comes to the minimum down payment requirement, the FHA doesn’t make a distinction between first-time buyers and those who have owned homes before.

The down payment requirement can also be influenced by the borrower’s credit score. You need a credit score of 580 or higher to qualify for the minimum 3.5% down payment. First-time buyers with scores between 500 and 579 might have to put down 10%.

(Borrowers with credit scores below 500 generally do not qualify for FHA loans.)

8. Does the FHA offer down payment assistance?

The FHA itself doesn’t directly offer down payment assistance programs to borrowers. But they do allow first-time home buyers (and all eligible borrowers) to use these assistance programs.

Down payment assistance is usually offered by state and local housing agencies, sometimes in partnership with nonprofit organizations. It can come in the form of grants, forgivable loans, or low-interest second mortgages that cover a portion of the down payment.

Here’s a list of local home buying programs, organized by state:

9. Can a relative give me money for the down payment?

Yes, the FHA allows home buyers to use gift funds provided by an approved third-party donor to cover some or all of the down payment. So the money doesn’t necessarily have to come from your own pocket.

This is ideal for first-time buyers who struggle to come up with the funds needed for an FHA loan down payment and closing costs. But the money must truly be a gift, and the donor must sign a letter to this effect.

10. Do I need good credit to qualify?

First-time home buyers need a credit score of 500 or higher to qualify for the FHA loan program. To qualify for the 3.5% down payment option mentioned above, you will need a score of 580 or higher.

FHA loans tend to be a bit more “forgiving” than conventional financing, especially when it comes to the borrower’s credit score. Even so, first-time buyers with very poor credit might have trouble qualifying for this program.

You should also know that mortgage lenders can establish their own credit score requirements, and they might be stricter than the FHA. Some lenders won’t offer financing to borrowers with scores in the low-500 range, even though it technically meets the minimum requirement for an FHA loan.

11. Do FHA loans have drawbacks for home buyers?

All mortgage options have pros and cons associated with them, and the FHA loan program is no different.

Here are three potential drawbacks for first-time buyers who use FHA loans:

Mortgage insurance: The FHA loan program requires an upfront mortgage insurance premium that equals 1.75% of the loan amount, along with an annual premium that comes to 0.55% for most borrowers. And unlike the private mortgage insurance (PMI) assigned to some conventional loans, FHA mortgage insurance often cannot be canceled. So you might have to pay it for as long as you keep the loan.

Property requirements:  First-time home buyers using FHA loans can only purchase a house that meets the minimum property requirements (MPRs) established by HUD. These requirements help to ensure that the home is habitable without any major safety or structural issues. But they could also limit your property choices.

Seller perception: In a competitive market where sellers receive multiple offers, a first-time buyer with an FHA loan might lose out to a conventional offer or an all-cash offer. Some sellers have a negative view of FHA loans because of the property requirements mentioned above. But depending on current real estate market conditions in your area, this may or may not be an issue for you.

12. How do I apply for the program?

The FHA loan application process is the same for first-time home buyers and repeat buyers alike. For the most part, it mirrors the application process for conventional mortgage loans, but with a few key differences.

Here are the steps we recommend when using an FHA loan to buy your first home:

  • Establish a budget. Before you apply for an FHA loan, you should establish a maximum limit for your monthly housing costs.
  • Get pre-approved by a lender. Mortgage pre-approval will help you determine how much you can borrow, and can also make sellers more inclined to accept your offer.
  • Submit an application. FHA loans use the same standard application form as conventional mortgage financing. It’s known as the Uniform Residential Loan Application (or Fannie Mae Form 1003).
  • Start house hunting. Try to limit your housing search to properties you can afford and that are in good condition. Generally speaking, “fixer-upper” properties do not qualify for FHA financing.
  • Home appraisal. Any property purchased with an FHA loan must be appraised to determine its market value and overall condition. Mortgage lenders use the appraisal to make sure they are not lending more than the home is actually worth.

Once you’ve completed all of these steps, you’ll move into the mortgage underwriting phase of the process. The underwriter will review the loan to make sure it meets FHA requirements.

13. Can FHA loans be used for any type of property?

First-time home buyers can use an FHA loan to purchase various types of properties. This includes detached single-family homes, condominiums, and multi-unit properties (up to four units). The home must serve as your primary residence. Vacation homes typically do not qualify for FHA financing.

Key Takeaways From This Guide

We’ve covered a lot of important information in this guide. Here are the most important points you should take away from this:

  • FHA loans are not just for first-time home buyers, but they’re especially popular with this group.
  • Last year, more than 80% of all FHA loans went to first-time buyers in particular.
  • This program offers a low down payment that’s ideal for borrowers with limited savings.
  • FHA loans can also be easier to obtain than conventional mortgages.
  • Drawbacks include mortgage insurance, property requirements, and negative perceptions among some sellers.
  • The maximum amount you can borrow will depend on your debt-to-income ratio and FHA loan limits in your county.
  • First-time buyers need a credit score of at least 500 to be eligible for an FHA loan, and a score of 580 for the minimum 3.5% down payment.
  • You can use gift funds from an approved donor to cover some or all of your down payment expense.
  • FHA loans can be used for various property types, including single-family homes, condominiums, and multi-unit properties, as long as it’s your primary residence.

Disclaimer: Every home buying scenario is different, because every borrower is unique. As a result, portions of this article might not apply to your situation. We encourage you to continue your research before settling on a specific mortgage product.

Brandon Cornett

Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author

The 2024 FHA Loan Handbook