Homebuyers

How FHA Loans Provide a Flexible Path to Homeownership for First-Time Buyers

Federal Housing Administration (FHA) loans have become the key to unlocking homeownership for many first-time homebuyers who may struggle to qualify for other types of loans.  

Thanks to a low down payment requirement and more flexible eligibility criteria, these loans are often popular with borrowers with not as much in savings, lower credit scores, and some debt.

“[FHA loans] can be a saving grace for somebody who really wants to buy a home,” said Hamest Manoukian, a New American Funding loan consultant based in Whittier, Calif. 

About 767,000 borrowers received an FHA loan in fiscal year 2024, according to the FHA’s annual report. This included 603,040 mortgages for home purchases, more than 82% of which went to first-time buyers.

Whether you have imperfect credit or limited funds for a down payment, FHA loans may offer the flexibility to help you achieve homeownership.

Who qualifies for an FHA loan?

Unlike traditional home loans, which may require high credit scores and sizable down payments, FHA loans aren’t as difficult for many buyers to secure.  

• Low down payment: Buyers with higher credit scores may be able to put down as little as 3.5% of the purchase price. This makes homeownership more attainable for those with limited savings.

Another benefit? You can use gift funds, money from a qualified source, like a family member, to cover FHA down payment and closing costs.

• Lower credit score requirements: Buyers with credit scores as low as 580 may be able to qualify for an FHA loan with 3.5% down. Those with scores between 500 and 579 may still be eligible but are generally required to make a 10% down payment.
• Higher debt-to-income ratios allowed: Lenders typically want to see a low debt-to-income (DTI) ratio for Conventional loans. (This is how much debt you have compared to how much you earn.) But FHA loans make room for buyers who are carrying more debt. This is especially helpful for recent graduates, young professionals, or families balancing multiple obligations.

“There are a few different factors that really help to assist a first-time buyer, someone who may not be strong enough credit wise or who may need some flexibility when it comes to stretching ratios,” said Leticia Avina, a New American Funding senior mortgage consultant based in Schaumburg, Ill.

Refinancing out of an FHA loan

While FHA loans may be a way into homeownership, many choose to eventually refinance into other types of loans.

That’s because FHA loans require a mortgage insurance premium (MIP), which comes with both an upfront cost due at closing and an annual premium paid in monthly installments.

If your down payment was less than 10%, you’ll pay MIP for the life of the loan. This may add a noticeable cost to your monthly payment.

But FHA loans aren’t permanent. Once you’ve built up equity in your home and met other eligibility requirements, you may be able to refinance into a Conventional loan without the ongoing mortgage insurance requirement.

FHA loan limitations

While FHA loans are an accessible starting point for many first-time buyers, there are trade-offs to consider.

• Mortgage insurance costs: MIP adds to your monthly expenses. Unlike private mortgage insurance (PMI) on Conventional loans, MIP won’t automatically fall off unless you refinance your mortgage.
• Property standards: FHA appraisals include strict inspection criteria. This can limit your options, particularly in competitive markets.
• Loan limits: There are caps on how much you can borrow with an FHA loan, which vary by region. In high-cost areas, this could limit your search.

While personal circumstances will vary for each buyer, Avina encouraged potential first-time buyers to weigh the long-term benefits of renting versus homeownership.

“If you bought a home now, you will most likely get some kind of appreciation that you wouldn’t if you kept renting,” said Avina.

Leticia Avina NMLS #188284

Hamest Manoukian NMLS #485360