FHA Loans for the First Time Home Buyer

If you’re looking at buying your first home, you probably have a lot of information to sift through.  For example, you are likely learning about the real estate market and how to choose a suitable property, from the appeal of certain neighborhoods, to the issues that come with “charming fixer-uppers”, to the frustrations of finding the size and amenities you want in a price range that you can afford.  But if you haven’t yet gotten pre-approved for a loan, you could have a lot more trouble in your future.  If you have a low income, an insufficient down payment, or a poor credit history (low FICO score, a past bankruptcy, etc.) you may not even qualify for a loan, especially in this economy, when lenders are being particularly careful.  So one more thing you may want to put on your radar is the possibility of an FHA loan.  Here’s what you’re looking at.

Loans backed by mortgage insurance from the Federal Housing Administration (FHA) have been around since the 1930s, when the program was implemented in an attempt to stop the flood of foreclosures that hit the market during the Great Depression.  The result of government backing for home loans was that lenders could once again start approving loans for less-than-perfect applicants, knowing that they would get their money one way or another.  Since then the FHA has doled out literally millions of home loans (an estimated 30 million plus).  This is not to say that you can just walk in and get approval, but if you meet the criteria you could end up with a favorable lending situation.  And for many first-time buyers, the benefits associated with an FHA loan make it a desirable alternative to private mortgage insurance.

So what do you need to qualify?  There are basic guidelines for qualification that you can shoot for, although depending on your particular situation, there may be additional criteria for eligibility.  For starters, you must have a stable job with the same employer for two years prior to application for an FHA loan; and your monthly payments (including mortgage, interest, and insurance) must not exceed 31% of your gross income. 

Next, you need a credit score of at least 620, although if you simply lack a credit rating (as in you’ve never held a credit card, taken out a loan, or leased an apartment, for example), you may still qualify.  You must also have a fairly clean credit history (generally no more than two 30-day overdue payments in the previous two years).  And even if you’ve had a bankruptcy, you could still be eligible if it was two or more years ago, you’ve paid court ordered restitution, and your credit history since is clean.

In truth, FHA loan requirements aren’t that stiff considering that these loans are made to help people with credit or other financial issues.  And they could help you to secure a better loan, on top of offering you the lowest insurance rates on the market.  So if you have any concerns about your ability to secure and pay a home loan, this could just provide the help you need to get into your first home, despite any prior setbacks with your finances or credit report.