Here’s a question we get a lot: Are FHA loans just for first-time home buyers, or can anyone use them to buy a house?
The short answer is no, FHA loans are not reserved solely for first-time buyers. Any borrower who meets the minimum qualification criteria for this program can use it to buy a house. But it is one of the most popular mortgage financing methods among first-time home buyers, and you’ll soon learn the reasons why.
FHA Loans: They’re Not Just for First-Time Home Buyers
The Federal Housing Administration’s loan program is very popular among first-time home buyers. According to an analysis conducted earlier this year, FHA discovered that 82% of its purchase loans went to first-time buyers.
But the program is not limited to just this group. Even people who have owned homes in the past can use FHA loans to buy another property, as long as the house being purchased is their primary residence.
First-time and repeat home buyers can qualify for FHA loans, as long as they meet the basic eligibility requirements. Those criteria include a down payment of 3.5%, a manageable level of debt, and a credit score of 500 or higher. (That’s the credit score cutoff used by the Department of Housing and Urban Development, which manages the program. Mortgage lenders might require higher scores.)
What Makes Them So Popular?
To understand why FHA loans are so popular among first-time home buyers, we must look at how the program works.
The Federal Housing Administration does not lend money directly to borrowers. They simply insure loans that are generated within the private sector by mortgage lenders. It’s important to note that this insurance protects the lender, not the borrower. If a home buyer who uses an FHA loan defaults on the mortgage down the road (i.e., stops making payments), the lender can be covered for financial losses.
So the mortgage lender makes the loan, and the federal government insures it against default-related losses.
As a result of this insurance backing, FHA home loans tend to have more flexible qualification criteria when compared to conventional mortgage loans (that are not backed by the government). In other words, first-time home buyers often find it easier to get approved for an FHA loan compared to conventional. This is one reason why the program is so popular among first-time buyers.
The down payment is another reason.
The FHA loan program offers one of the lowest down-payment options of all mortgage programs, with the exception of VA and USDA loans that offer 100% financing. While FHA loans are not just for first-time home buyers, they appeal to this group because of the low down payment. Borrowers who use this program can make a down payment as low as 3.5% of the purchase price or the appraised value, whichever is lower.
As an added benefit, the down payment can be gifted from a third party, such as a family member or close friend. So it doesn’t necessarily have to come out of the borrower’s pocket.
Conclusion: Let’s revisit the question at hand. Are FHA loans just for first-time home buyers? No. This program is popular among first-time buyers because of the low down payment and flexible qualification criteria. But it is certainly not limited to this particular group. Even those who have purchased homes in the past could qualify for FHA financing, as long as they meet the minimum requirements mentioned above.