While it might be exciting to tour homes and research neighborhoods, there’s plenty of other work to do, too. To get the keys to your new home, you’ll need to examine lenders, weigh all of the loan options and provide personal and financial paperwork to obtain your funding.
Luckily, the process of buying a home is often worth every bit of the stress and the occasional headache. With each mortgage payment you make, you build wealth through home equity. This can help secure your financial well-being. That alone is a pretty big payoff — one that will serve you well for years to come.
The good news is that choosing the right mortgage loan doesn’t have to be stressful. Many different mortgage loan options are available to first-time homebuyers, from FHA loans to conventional loans and more. Plus, Paddio is here to help you make the best decision for your unique financial needs.
Mortgage Options for First-Time Homebuyers
There is no shortage of loan options for first-time homebuyers. There are even certain types of loans, like the Federal Housing Administration (FHA) loan, geared toward the needs of new buyers.
FHA loans are a great option because they were created to help new homebuyers achieve their homeownership goals. These loans come with a number of unique perks and they can be an excellent tool for buyers who find that conventional loans are out of reach.
What is an FHA Loan?
An FHA loan is a type of mortgage issued by FHA-approved lenders and guaranteed by the Federal Housing Administration (FHA). It is used to cut down on the risk of default that lenders face when issuing loans to buyers with low income or credit scores. This makes it possible for lenders to be more flexible with their borrower requirements and makes FHA loans a feasible option for new buyers.
Is an FHA Loan for First-Time Homebuyers Only?
FHA loans are not limited to first-time buyers. FHA home loans are available to all types of homebuyers, whether they currently own a home or are entering the homeowner market for the first time. In fact, FHA loans can be a great option for buyers who have credit blemishes, higher debt-to-income ratios or other hurdles that may make it tough to get approved for a conventional loan.
According to the latest FHA data, the majority of FHA borrowers in 2020 — about 83.1% — were first-time homebuyers. That’s because the easier qualifications for FHA loans make them attractive to first-time homebuyers, who may not be able to come up with the down payment for a conventional loan.
What Is the Down Payment on an FHA loan?
While the down payment requirements vary from lender to lender, it is possible for borrowers to put just 3.5% down on their homes. That’s the minimum down payment requirement set by the FHA, and it’s one of the biggest perks of using an FHA loan to buy a home.
Other home loan options, such as a conventional loan, can require down payments as high as 20%, which is a considerable difference.
FHA Loan vs. Conventional
| FHA Loans | Conventional Loans | |
|---|---|---|
| Credit Score | As low as 580* | At least 620; although many lenders require higher |
| Down Payment | As low as 3.5% | 3% to 20% |
| Mortgage Insurance | Required for all buyers | Required if down payment is less than 20% |
| Insurance Premiums | Upfront: 1.75% of the loan Annual: 0.45% to 1.05% | 0.5% to 1% of the loan |
| Down Payment Assistance Programs | Yes | No |
*It's important to note that FHA lenders are free to set their own credit score requirements. Paddio currently looks for credit scores of 620 and above.
Types of FHA Loans
Several different types of FHA loans are available to borrowers. These include:
FHA Purchase Loans
These types of FHA loans are used to finance your primary residence — and are what most buyers opt for when using an FHA loan to buy a home.
FHA Streamline Refinance
FHA Streamline Refinance loans are a type of refinance loan available to homeowners who currently have FHA loans. These loans can be used to lower an FHA loan's interest rate, reduce monthly payments or shorten a loan term without having to go through the home appraisal process.
FHA Cash-Out Refinance
An FHA Cash-Out Refinance loan is a loan that lets homeowners refinance their FHA loans for up to 80% of their home’s value in order to cash out equity. An FHA Cash-Out Refinance loan replaces your current loan with a new loan that includes the total amount borrowed from the equity plus the remainder of the balance on the original home loan.
FHA Home Equity Conversion Mortgages (HECM)
These types of FHA loans are only available to homeowners ages 62 or older and allow the homeowners to exchange some of the equity in their homes for cash.
FHA Energy-Efficient Mortgages (EEM)
These unique types of FHA mortgages are offered to buyers who want to make energy-efficient home improvements. These mortgages offer buyers extra funds that can be used to pay for updates to make the home more energy-efficient.
FHA 203(k) Mortgages
These types of FHA loans are geared toward buyers who want to purchase fixer-uppers. With this type of FHA loan, you can finance both the purchase of a house and the costs of rehabbing or repairing the home.
Section 245(a) Loans
Low-income buyers who are expected to have increases in their income over time can benefit from this FHA loan. This type of loan starts the buyer’s payments out small but gradually increases them over time as their earnings increase.
Do FHA Loans Have Loan Limits?
As with other types of home loans, there are FHA loan limits — but they vary based on the county where you are buying a home. The FHA loan limits for 2024 range from $498,257 to $1,149,825 — with counties with higher home prices having higher limits, and counties with lower home prices having lower limits. The variations in limits are to ensure that homebuyers in areas with higher-than-average home prices are still able to use FHA loans to become homeowners.
Conclusion
Buying a new home should be exciting, not stressful. As a first-time homebuyer, an FHA loan can help make your homeownership dreams a reality. From the flexible credit and income restrictions to the lower down payment requirements, these loans were created with the needs of buyers like you in mind.
Whether you opt for an FHA loan, a conventional loan or another type of mortgage loan, Howie is here to help you make the best decision for your unique financial needs.
