One of the best ways for first-time home buyers to qualify for a mortgage is with an FHA loan. Here’s everything you need to know to get an FHA loan to buy a house in 2023.
What is an FHA Loan?
The FHA loan was created to help more Americans qualify for a home mortgage. Conventional loans are great for those who can qualify, but millions of Americans can’t get one when they’re first interested in buying a home. What makes FHA loans different? The difference is that the Federal Housing Administration – or FHA – provides mortgage insurance on mortgages provided by FHA-approved lenders. Conventional loans, on the other hand, are insured by Fannie Mae and Freddie Mac.
How Do You Qualify for an FHA Loan in 2023?
There are a few main requirements you need to meet to get an FHA loan.
- Your credit score should be at least 580
- You need at least 3.5% of the home’s purchase price as a down payment
- You will need to agree to pay MIP – the Mortgage Insurance Premium
- Your Debt-to-Income ratio must be less than 43%
- The home will need to be your primary residence
- You need proof of employment and steady income
Note that if your credit score is less than 580 but better than 500, you can still qualify for an FHA loan. But instead of needing just a 3.5% down payment, you’ll need at least 10% of the home’s purchase price. For some home buyers, these numbers may be intimidating. For example, let’s say they want to buy a $300,000 home. To pay 3.5% of the purchase price, that means they need to say up $300,000 x 3.5% = $10,500 as the down payment. If their credit is worse and they need a full 10%, they will need to save up $30,000 cash for the down payment. If the buyer’s credit score isn’t very good – let’s say it’s 550 – it can be frustrating for them. They won’t be able to buy the home with 3.5% down unless they can get their credit score up by 30 points. But compare these situations to a conventional loan. To avoid paying private mortgage insurance (PMI) with a conventional loan, you need at least 20% down! And the minimum credit score is 620, so you’d have to raise your credit score by 70 points just to qualify. The 30 points to get from 550 to 580 is much better than trying to climb all the way to 620.
Pros and Cons of FHA Loans
The main advantage of getting an FHA loan is it’s easier to qualify. That means you can buy a home in 2023 instead of having to wait a few more years while your credit improves and you save up a down payment. The main disadvantage is that you will always need to pay the Mortgage Insurance Premium – or MIP – for as long as you have the loan. It doesn’t matter if you have it for 1 year or 30 years – as long as you have the loan, you will be paying MIP. That’s different from a conventional loan, where you can stop paying PMI once you’ve paid off enough of the home loan.