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Federal Housing Administration (or "FHA") loans are a popular mortgage choice for many first-time homebuyers. That's because FHA loans allow for a lower down payment and have more flexible credit, income and asset requirements than conventional loans.

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Conventional mortgages typically have higher base interest rates than FHA loans for consumers with less than perfect credit. Conventional loans also often require higher credit scores. Lenders will usually require you to buy private mortgage insurance if you make a down payment of less than 20%. For conventional mortgages, lenders may also want you to have a lower amount of total monthly debt compared to your monthly income (this is called your "debt-to-income ratio" or "DTI").

FHA loans may be a good option for individuals with less than perfect credit and higher DTIs because of their more flexible credit standards and lower down payment requirements. These loans are backed by the Federal Housing Administration. The government doesn't loan homebuyers money. Instead it guarantees mortgages offered by private lenders so these lenders can offer a loan option with more lenient down payment and credit requirements. Home buyers often prefer FHA loans because they can make it possible to become a homeowner even with other debts like student loans.

FHA loan requirements for first time homebuyers

There are many requirements that can make FHA loans attractive to first time homebuyers. These include:

  • Down payments as low as 3.5% of the purchase price. This is particularly useful to home buyers who do not have the cash to make a large down payment.
  • Lower minimum credit scores. Some lenders may give you an FHA loan with a credit score as low as 540. These mortgages typically have higher down payment requirements however.
  • Higher debt-to-income ratios. Lenders of conventional mortgages generally don't want your debt-to-income ratio to be higher than 36%. With an FHA loan, you can sometimes have a DTI as high as 43%.
  • Competitive interest rates. FHA loans can be just as competitive with rates as conventional loans. Be sure to look at the annual percentage rate (APR) when you are comparing mortgage offers. APR shows the total cost of a loan, including interest payments and any closing costs, fees, and mortgage insurance you might have to pay.

FHA loans have other requirements you'll want to understand before you choose one. For example, you will need to pay an upfront mortgage insurance premium as well as an annual premium. There are also limits on the amount of money you can borrow. Learn more about FHA loan requirements and advantages and disadvantages.

You aren't restricted to buying just your first home with an FHA loan. You can buy your next home as well. You can only use an FHA loan to buy a primary residence – that is the house where you intend to live – and in most cases you can only buy one house at a time with an FHA loan.

Credit score considerations for FHA first time homebuyers

FHA loans can have more flexible credit score requirements compared to conventional loans. You may be able to get a loan backed by the FHA with a score as low as 540. However, you are likely to be required to make a 10% down payment with this credit score. Lenders generally want your credit score to be at least 580 before they will allow you to make a down payment of just 3.5%. There are other advantages to having a higher credit score when you apply for a mortgage. Lenders may offer better interest rates to customers with higher credit scores, which can save you money on interest payments over the life of the loan.

To learn more about all the options Freedom Mortgage offers homebuyers, call one of our helpful Loan Advisors at 877-220-5533.

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