FHA Loan: First-Time Buyer Requirements

FHA loans are government-insured mortgages backed by the Federal Housing Administration. They are designed for borrowers who cannot qualify for conventional loans due to lower credit scores, smaller down payments, or higher debt-to-income ratios. FHA loans are not limited to first-time buyers (anyone who meets the requirements can apply), but they are the most popular option for first-time buyers because of the low 3.5% down payment requirement. In 2024, FHA loans accounted for approximately 15% of all home purchases, with an average borrower credit score of 670.

FHA loan limits vary by county and are updated annually. In 2024, the floor (lowest limit, in most of the US) is 472,030 USD for a single-family home. The ceiling (in high-cost areas like San Francisco, New York City, and Los Angeles) is 1,089,300 USD. Check your specific county limit at hud.gov/program_offices/housing/sfh/lender/origination. If the home you want exceeds your county's FHA limit, you need a conventional loan or a jumbo loan. FHA limits cover 1-4 unit properties, with higher limits for multi-unit (2-unit: 604,400 USD floor, 3-unit: 730,525 USD floor).

FHA has two credit tiers: 580 or above qualifies for the minimum 3.5% down payment. 500-579 qualifies but requires 10% down. Below 500 is not eligible. Most FHA lenders impose overlays (stricter requirements than FHA minimums): many require a minimum 580 score and some require 620. Your credit score also affects your interest rate. A borrower with a 700 score may get a rate 0.5-1% lower than a borrower with a 580 score, costing 50-100 USD less per month on a 300,000 USD loan. Check your credit score for free at annualcreditreport.com and dispute any errors before applying.

On a 300,000 USD home, 3.5% down is 10,500 USD. This is significantly less than the 20% (60,000 USD) needed to avoid PMI on a conventional loan. Down payment sources: personal savings, gift funds from family (FHA allows 100% gift down payments with a gift letter), down payment assistance programs (available in every state, providing grants or forgivable loans of 3-5% of the purchase price), and employer assistance programs. FHA allows seller concessions up to 6% of the purchase price, which can cover closing costs but not the down payment itself.

FHA guidelines: your housing payment (mortgage, taxes, insurance, HOA) should not exceed 31% of gross monthly income (front-end ratio). Total monthly debt payments (housing plus car loans, student loans, credit cards, and other debt) should not exceed 43% (back-end ratio). With compensating factors (significant cash reserves, minimal payment increase from current rent, strong employment history), FHA allows back-end ratios up to 50-57% through their automated underwriting system (TOTAL Scorecard). A 5,000 USD gross monthly income allows approximately 1,550 USD housing payment (31%) and 2,150 USD total debt payments (43%).

FHA requires a 2-year employment history (does not need to be with the same employer, but should show stability and consistency). Gaps in employment must be explained and may require additional documentation. Self-employed borrowers need 2 years of tax returns showing stable or increasing income. Income sources counted: salary, overtime (if consistent for 2+ years), bonuses, commissions, self-employment income, alimony and child support (if documented for 12+ months with 3+ years remaining), and Social Security or disability income. Part-time income counts if consistent for 2+ years.

FHA requires two mortgage insurance premiums (MIP). Upfront MIP (UFMIP): 1.75% of the loan amount, paid at closing (typically rolled into the loan). On a 290,000 USD loan, this is 5,075 USD. Annual MIP: 0.55% of the loan amount per year, paid monthly (for most borrowers with less than 5% down). On a 295,000 USD loan (including rolled-in UFMIP), annual MIP is approximately 135 USD per month. This is the main cost disadvantage of FHA loans compared to conventional loans, where PMI can be removed at 20% equity.

If your down payment is less than 10%, FHA MIP stays for the entire life of the loan (it never comes off). If your down payment is 10% or more, MIP drops off after 11 years. This is a significant long-term cost. Strategy: use an FHA loan to buy the home, build equity, then refinance to a conventional loan once you have 20% equity (eliminating mortgage insurance entirely). Refinancing typically costs 2,000-5,000 USD in closing costs and requires a credit score of 620+ for conventional loans. Many FHA borrowers refinance to conventional within 3-5 years.

Not all lenders offer FHA loans, and experience varies widely. Look for lenders who regularly process FHA loans (FHA-approved lenders are listed on HUD's lender search at hud.gov). Large FHA lenders include: Rocket Mortgage, United Wholesale Mortgage, loanDepot, and many local credit unions. Get pre-approved before shopping for homes. FHA pre-approval examines your credit, income, employment, assets, and debts. The process takes 1-3 days for pre-approval and 30-45 days from application to closing. Compare rates from 3-4 lenders on the same day.

FHA appraisals are stricter than conventional appraisals because FHA requires the home to meet Minimum Property Standards (MPS). The appraiser checks: structural soundness, safe electrical and plumbing, working heating and cooling, no water damage or pest infestation, adequate roofing (minimum 2-3 years of remaining life), no peeling paint on homes built before 1978 (lead paint risk), and safe access. If the property fails MPS, repairs must be completed before closing (seller typically pays for repairs, or the deal falls through). FHA appraisals cost 400-700 USD and stay with the property for 180 days.

At closing, you sign all loan documents, pay closing costs (2-5% of purchase price minus any seller concessions), and receive your keys. Your first mortgage payment is typically due 30-60 days after closing. FHA loans allow you to refinance to another FHA loan (FHA Streamline Refinance, which requires less documentation) or to a conventional loan. Plan your refinancing timeline: track your home's value using Zillow estimates and comps, monitor your credit score improvement, and refinance to conventional when you have 20% equity and a 620+ credit score to eliminate mortgage insurance permanently. This guide is informational only, not financial or legal advice.