What is a First-Time Homebuyer Loan? (FHA Loans)
First-time homebuyer loans offer a zero down payment or low down payment, reduced interest, limited fees and the possibility of deferring payments. These types of loans are offered at a federal level by the Federal Housing Administration and by most states.
The FHA defines a first-time homebuyer as a person who has not owned a home for three years. This includes single parents and displaced homemakers who only owned a house previously with a spouse.
The FHA insures lenders against potential default and requires a minimum credit score of 580 or above for a loan with a down payment of 3.5%. In addition to your credit score, you will need to provide full documentation of your income and assets and meet the lender’s debt-to-income ratio, which is typically a maximum of 41% to 43% of your monthly gross income that goes toward the minimum payments on all of your revolving and installment debts.
Pros of First-Time Homebuyer Loans
The comparatively lower restrictions on these loans make them ideal for first-time homebuyers. You might want to consider these loans if:
You don’t have enough money saved up for a large down payment.
You have a limited ability to meet high interest payments and fees.
Your credit score is not high enough to qualify for other loan types.
But even if you do have funds saved for a large down payment, the low interest rates on first-time homebuyer loans could be too good to pass up.