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What Are FHA Loans for First-Time Home Buyers?

Being a first-time home buyer is equal parts exciting and stressful. The idea of finding the home of your dreams to start the next chapter of your life is thrilling, but the thought of making such a major financial commitment is nerve-wracking. And once you start the process, your head can go spinning. What are FHA loans? How do I obtain a mortgage? What other types of mortgages are available? What are closing costs?

young couple holding keys outside of their new home

The best thing you can do as a first-time home buyer is to take things one step at a time. The first step to buying your first house is obtaining a mortgage. Several factors go into choosing the right one, which you will walk through in this article. Learning the types of loans available to you will help you make an informed decision about your finances now and well into the future.

What Types of Mortgage Loans Are Available to First-Time Home Buyers?

Conventional Loans

Conventional loans are mortgages that are not insured or guaranteed by the federal government. This means they have strict requirements and typically require a higher down payment, a higher credit score, and a lower income-to-debt ratio. Conventional loans are most often fixed rate and are less costly than loans guaranteed by the federal government.

VA Loans

The U.S. Department of Veterans Affairs (VA) guarantees VA loans. They don’t make the loan but guarantee all mortgages are made by qualified lenders. These unique guarantees allow veterans to secure home loans with favorable terms and sometimes without the need for a down payment. VA loans are typically quicker to secure and easier to qualify for than traditional loans. VA loans are a great option for veterans looking to buy their first home.

FHA Loans

FHA loans are a unique type of loan from the Federal Housing Administration (FHA) as part of the U.S. Department of Housing and Urban Development (HUD).  These FHA loans are designed to require lower down payments and are easier to qualify for than conventional loans. FHA loans are ideal for first-time home buyers because they have less stringent credit requirements and require a low down payment, sometimes as low as 3.5% of the purchase price with a 580 or above FICO score. A FICO Score is a three-digit number based on all of the data pulled from your credit reports. It helps lenders determine how likely you are to repay a loan. Your FICO score can impact how much you can borrow, how many months you have to repay a loan, and how much it will cost (the interest rate) over the entirety of the loan.

FHA Loan Requirements

Whether you’re already sure you want to secure an FHA loan or are still hoping to learn more about this beneficial type of mortgage for first-time buyers, it’s a good option to explore. FHA loans are most beneficial to first-time buyers who have little savings or are dealing with credit challenges.
The FHA insures mortgages issued by lenders. Since lenders have the safety net of the insurance, banks, credit unions and other financial institutions are willing to offer favorable terms to borrowers who might not otherwise be qualified for a home loan.

FHA loans can be used to buy or refinance single-family homes, condominiums, or certain manufactured homes. Borrowers can also use FHA loans toward new construction or renovations on an existing home.
Below are various FHA loans typically used to buy a house:
  • Basic Home Mortgage Loan 203(b) — Designed as fixed or adjustable rate and is available for several types of homes
  • 203(k) Rehab Mortgage — Designed to finance the purchase and renovations of a home within one single loan
  • Construction to Permanent (CP) Loan — Designed to finance the construction of a home as well as the land where it will be constructed
  • Title | Property Improvement Loan — Designed to purchase a manufactured home or to repair an existing one
  • Energy Efficient Mortgage (EEM) — Designed to finance energy-efficient upgrades during a refinance or home purchase
Navigating the process of securing a mortgage for the purchase of your first home can be stressful. Take your time to decide how much home you can afford, and then work to finance accordingly based on your budget. If you have the money to put down a larger down payment and also cover closing costs, you might have more negotiating power with a conventional loan. If you have a lower credit score, you might want to explore the benefits of an FHA loan.

At First National Bank and Trust, our goal is to match you with the right type of mortgage loan for your personal circumstances. We work to make the home mortgage loan process simple and ensure loan decisions are quick. We invite you to learn more about the loan types we offer and to get prequalified now online. If you prefer to apply in person, find a First National Bank and Trust location near you. We have 16 branches throughout  Southern Wisconsin and Northern Illinois. 
 When you finally move into your new home, check out out New Homeowner's Move-in Checklist.