What is the process of applying for an FHA first-time home buyer loan?


If you’ve never purchased a home, the loan process can seem daunting. You might be mystified about the eligibility and down payment requirements, the many types of mortgages, and the lingo that is used. While the process might seem overwhelming, FHA loans make it easier for first-time homebuyers to achieve the qualification they seek. 

Although first-time homebuyers are the primary users of  FHA loans, it is a misconception that the program is only for first-time homebuyers. An FHA loan can be used by anyone looking to purchase a primary residence that does not already have an FHA-backed mortgage on a home they currently own.

What is an FHA loan?

An FHA loan is not actually a loan by itself. Instead, it is mortgage insurance that is provided by the Federal Housing Administration to secure loans issued by lenders who have been approved by the FHA. Since the mortgages are federally insured, it reduces the risk for lenders, making it easier for borrowers with low and moderate incomes to qualify. FHA loans permit borrowers with lower credit scores to achieve a lower down payment than a conventional mortgage would.

Borrowers can borrow up to 96.5% of a home’s value with an FHA-backed mortgage loan, which means that you will need to pay a down payment of 3.5% of the total cost. Your credit score will also need to be at least 580 to qualify. People whose credit scores range from 500 to 579 might still be approved if they can make a down payment of 10% or more of the purchase price. However, these minimum credit score requirements are from the FHA, and individual lenders might require higher credit scores.

Like all loan programs, FHA loans also have closing costs and pre-paid items that are required to be paid at closing in addition to the minimum 3.5% down payment. Closing cost and prepaid items can be an additional 3% – 4% of the purchase price, bringing the total cash to close to about 6.5% to 7.5% of the purchase price. There are many strategies and programs available to First-time Home Buyers that can help assume or cover the closing cost required to be paid by the borrower.

What you need to know about FHA Loans - The Mortgage Hub

FHA loan requirements for first-time homebuyers

To qualify for an FHA loan as a first-time buyer, you will need to meet the following requirements:

  • For a 3.5% down payment, a FICO® score of 580 or higher
  • For a 10% down payment, a FICO® score from 500 to 579
  • A debt-to-income ratio of less than 46.9% front end and 56.9% back end or the maximum allowed by Automated Underwriting System.
  • Steady employment and verifiable income
  • Must be purchasing a home as your primary residence

FHA loan process for a first-time homebuyer

As a first-time homebuyer, you should make certain that your finances are in order before applying for a mortgage. Check your  FICO® score and get copies of your credit reports from the three main credit reporting agencies, including Experian, Transunion, and Equifax. You can get a free copy of your credit reports from each CRA once per year through annualcreditreport.com. Review your credit reports carefully, and challenge any inaccurate information that might appear. Keep in mind that the lender or broker will require to pull their own tri-merge credit report. The report you will be pulling is so that you may become better acquainted with your profile prior to speaking with a mortgage professional. 

If you have a qualifying credit score, you should then schedule an initial conversation with a mortgage professional. The initial conversation will allow the mortgage broker to obtain a better understanding of your situation and request the exact required documents needed for your situation. . Find a broker that is FHA-approved, and apply for pre-qualification for a first-time homebuyer’s loan. This will tell you how much home you can buy. 

When you fill out your mortgage application, make sure that you are as accurate as possible. If you fail to disclose information or do not provide documents that are requested, the process will be delayed, and your application could be denied.

After you are pre-approved, your mortgage broker should review your preliminary loan options with you. This will allow you to obtain a better understanding of the terms and qualifications prior to beginning your home search. You will then look for a home that fits within your budget and make an offer. If the offer is accepted, you will then continue with the mortgage application process with your mortgage broker.  

During the FHA loan process, the lender will ask for documentation of your employment history and finances. Make sure that you have W-2s, paystubs, bank statements for all accounts, and tax returns. If you are self-employed, you will need to have a copy of your most recent profit and loss statement.

Locking your interest rate

Mortgage interest rates frequently fluctuate. To protect yourself from the potential of rising rates, you can lock your interest rate upon entering a purchase contract. Locking your rate helps to guarantee that your interest rate will not change during the 25 – 45 day loan process.

Programs for First Time Home Buyers - The Mortgage Hub

Programs available for first-time homebuyers

There are multiple programs available for first-time homebuyers, including the following:

  • FHA-backed loan with a 30-year fixed rate
  • FHA-backed loan with little to no closing costs at a slightly higher fixed interest rate for 30 years
  • A VA-backed 30-year fixed-rate loan for current and former military service members or their surviving spouses. 
  • Conventional 30-year fixed-rate loan with a minimal down payment of 3%. (This program requires higher credit scores and permits a lower debt to income ratio than an FHA-backed loan. 

What is the timeframe of the loan process?

The mortgage application process can take 25 – 45 calendar days. During this process, you will need to perform a home inspection, property appraisal, obtain insurance, as well as go through the lender’s formal underwriting process. Once complete, your broker will schedule a closing and you will be a homeowner.

The availability of FHA-backed loans makes it easier for many people to purchase their first homes. While the loan process might initially seem daunting, your lender can help to walk you through the process. To learn more, contact us today to schedule an appointment.

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