If you’re in the market for a home, you may have come across the term “single-family home” and wondered what it means and if that is what you are looking to buy.
Generally, a single-family home refers to a freestanding home set on its own piece of property. It can be occupied by a single individual or a large family, as long as it’s occupied by a single household.
Owning a single family home comes with a number of benefits, including more privacy and space than other types of residential properties. However, this type of home also tends to come with a higher price tag and more responsibility. Here’s a closer look at what single family homes are and the pros and cons of buying one.
What Is a Single-Family Home?
Generally speaking, the term single-family home refers to a home that is designed for, occupied by, and maintained by one person or household. When you buy a single-family home, you will own both the home and the property it sits on. This is in contrast to other types of properties, such as condominiums (condos), where you only own the interior of your unit and share ownership of common areas with other homeowners in the complex.
In most cases, a single-family home is defined as one that is freestanding and not attached to homes owned by other individuals. However, the government has a broader definition. According to the U.S. Census Bureau, a single-family home includes fully detached homes, as well as semi-detached row houses and townhouses. In the case of attached units, the units must be separated by a ground-to-roof wall in order to be classified as a single-family structure. Also, these units must not share heating/air-conditioning systems or utilities.
In some places, a single-family home is defined in part by how many kitchens it has. Depending on zoning laws, adding a second full kitchen to an in-law’s apartment, for example, can cause a house to be redefined as a multi-family building. If you’re planning on doing this type of renovation, be sure to check local zoning laws beforehand.
Whether a home is classified as a single-family or multi-family home can have an impact on the type of mortgages you qualify for. Both single-family homes and two- to four-unit properties fall under residential lending guidelines. (A property with five or more units is considered commercial property.) You can use a conventional mortgage to purchase a home with four or fewer units, whether it’s a single- or multi-family home. If you’re buying a multi-family home with five or more units, you must use a commercial mortgage. Commercial mortgages have different terms than residential mortgages do. 💡 Quick Tip: When house hunting, don’t forget to lock in your home mortgage loan rate so there are no surprises if your offer is accepted.
First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.
Pros and Cons of a Single-Family Home
As you shop for homes, it’s important to consider the various advantages and disadvantages of a single-family residence.
Some of the advantages are:
• More space Single-family homes tend to offer more space than other types of housing, and it belongs to you alone. They may have large yards where children and dogs can play or where you can plant a vegetable garden. They may also have storage in attics, garages, or basements, which aren’t shared between multiple units.
• Privacy Single-family units that don’t share walls with neighbors offer more privacy. You are less likely to hear neighbors’ activities, and they are less likely to be bothered by yours.
• More design features Single-family homes may be available in a broader range of designs and layouts, from Cape Cods or colonials to ranch homes and contemporary designs. You can also make changes to the building or landscape design without input from neighbors with a shared interest in the space.
• Room to grow Single-family homes may offer you more options for additions if you have a growing family or if aging parents may come to live with you. For example, single family detached homes with larger plots of land may allow additions that wouldn’t be possible in condo units.
• May offer higher appreciation Single-family homes tend to appreciate in value more than condos and townhouses.
• Option to rent As the sole owner of a single-family home, you have the option to rent out the house if you decide to move and wish to hang on to the property.
While these factors are attractive, it’s important to weigh potential disadvantages of buying a single-family home as well. Here are some to keep in mind:
• More expensive Single-family homes tend to be more expensive than other types of homes. That can mean a larger down payment and higher closing costs, and your mortgage payments may be higher.
• More maintenanceUnless your single-family home is part of a homeowner association (HOA) that provides basic services, you’ll be in charge of all home maintenance like lawn mowing and roof repairs. You’ll either have to take the time to do it yourself or hire help.
• Possible HOA fees Planned developments usually require HOA fees to cover the upkeep of common areas and shared structures.
• Less income potential With multi-family homes, you have the option to live in one unit while renting out the others. This allows you to bring in regular income to cover the cost of the mortgage and maintenance expenses.
Finding a Single-Family Home
Before you start looking for a single-family home, you’ll want to first determine how much home you can afford. You might start by calculating mortgage costs and getting prequalified for a home loan; prequalification often only takes a few minutes and provides an estimate of how much you might be able to borrow and at what rate (without impacting your credit).
You’re probably already searching real estate listings online and noting the property types. You might also want to do some research on housing market trends, especially if you live in one of the nation’s real estate hot spots.
You may also want to engage a real estate agent. They have expertise in local housing and zoning laws, know whether a list price is fair or above or below average, and can help you negotiate the price of a home you’re interested in buying.
If there’s any question about how a house is zoned, you can often look up zoning information through a particular city’s website.
Recommended: First-Time Home Buyer’s Guide
Who Should Get a Single-Family Home?
Single-family homes are a good fit for people who can cover the higher price tag, want privacy and flexibility, and are willing to take on a lot of responsibility.
If you qualify as a first-time homebuyer, there may be help available to buy a single-family home in the form of down payment assistance and low- or no-interest loans.
If you’re looking for a more affordable home and don’t mind giving up some privacy, you might want to consider a condo or townhouse.
A condo is like an apartment but is available for purchase. These units share walls with neighboring units, but you generally won’t have to worry about maintaining the property.
A townhouse, on the other hand, has multiple stories and will share one or two walls with other units. Like condos, townhouses are typically less expensive than single-family homes. Unlike a condo, you’ll own the property that the townhouse sits on.
If you’re looking to invest in real estate, you might consider buying a multi-family home. While this will likely cost more than a single-family home, you may be able to recoup the added cost (and, over time, earn even more) by collecting rent from tenants. 💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.
If You’re Thinking of Purchasing a Single-Family Home, SoFi Home Loans Can Help
Single-family homes are one of the most popular real estate options and often what people envision when they think about achieving the dream of home ownership.
This type of property typically sits on a parcel of private property and doesn’t share walls with neighbors, affording you a high level of privacy. You generally have more control over making enhancements to your home than you have with other types of properties, and usually have access to extra storage, including exterior storage space like a shed or garage.
However, don’t forget to consider the added responsibilities and costs when deciding on the right type of home for you and your family.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
How much does a single-family home cost?
The median price for an existing single-family home — one that’s already standing, not new construction — was $387,600 as of November 2023, according to the National Association of Realtors.
How much do I need to build a single-family home?
The cost of building a single-family home (not including land) can range anywhere from $42,000 to $900,000-plus depending on the home’s type and size and where you build. On average, the cost to build a house in the U.S. is about $329,000.
Can you get a loan to build a single-family home?
If you’re planning to build a single-family home from scratch, you can apply for a construction loan. With this type of loan, money is usually advanced incrementally during construction, as the home-building project progresses. Typically, you only pay interest during the construction period. Once the construction is over, the loan amount becomes due, and it is converted into a regular mortgage.
Photo credit: iStock/Dean Mitchell
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
FHA loans have been making homeownership more accessible for decades. Tailored to borrowers with lower credit, the FHA makes it possible to buy a house with a credit score of just 580 and only 3.5% down.
But home buyers aren’t the only ones who can benefit. For current homeowners, an FHA refinance may let you access low rates and home equity, even without great credit.
Not sure whether you’ll qualify for a mortgage? Check out the FHA program. You might be surprised.
Verify your FHA loan eligibility. Start here
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>Related: How to buy a house with $0 down: First-time home buyer
What is an FHA loan?
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA).
FHA insurance protects mortgage lenders, allowing them to offer loans with low interest rates, easier credit requirements, and low down payments (starting at just 3.5%).
Thanks to their flexibility and low rates, FHA loans are especially popular with first-time home buyers, home shoppers with low or moderate incomes, and/or lower-credit home buyers.
But FHA financing isn’t limited to a certain type of buyer — anyone can apply.
Verify your FHA loan eligibility. Start here
How does an FHA loan work?
The first thing to know about FHA mortgages is that the Federal Housing Administration doesn’t actually lend you the money. You get an FHA mortgage loan from an FHA-approved bank or lender, just like you would any other type of home mortgage loan.
The FHA’s role is to insure these mortgages, offering lenders protection in case borrowers can’t pay their loans back. In turn, this lets mortgage lenders offer FHA loans with lower interest rates and looser standards for qualifying.
The one catch — if you want to call it that — is that you pay for the FHA insurance that protects your mortgage lender. This is called “mortgage insurance premium” or MIP for the life of the loan or until the FHA home loan is refinanced into another type of mortgage. We go over this in detail below.
Types of FHA loans
FHA loans offer various options to meet different home buying needs. These government-backed loans are designed to make homeownership more accessible, especially for those with less-than-perfect credit scores or limited savings.
Each type of FHA loan is tailored to different financial situations and home buying needs. Here’s what you can expect.
Compare FHA loan quotes from multiple lenders. Start here
FHA mortgage loan
An FHA mortgage is ideal for first-time home buyers, requiring a minimum credit score of 580 for a 3.5% down payment. Those with credit scores between 500 and 579 can still qualify for a 10% down payment. These loans are popular due to their lenient credit score requirements and low-down payment options.
FHA rate-and-term refinance
An FHA refinance loan is suited for borrowers looking to improve their loan terms or lower interest rates, especially if their credit scores have improved since obtaining their original mortgage. It offers a way to adjust loan terms to better fit current financial situations.
FHA Streamline Refinance
For current FHA loan holders, the FHA Streamline Refinance provides an efficient way to refinance with minimal documentation and underwriting. It often results in lower interest rates and can potentially reduce mortgage insurance premiums. This option is advantageous for those who want to refinance without a complicated process.
FHA cash-out refinance
An FHA cash-out refinance allows homeowners to tap into their home equity, converting it into cash. It requires a minimum credit score of 620, and borrowers must leave at least 15% equity in their home after the refinance. It’s suitable for those needing extra funds for expenses or investments.
FHA Home Equity Conversion Mortgage (HECM)
HECM is a reverse mortgage for homeowners aged 62 and older, allowing the conversion of home equity into cash. It provides financial flexibility for seniors by enabling access to their home equity without selling the home.
FHA 203(k) loan
The FHA 203(k) loan is designed for home purchases requiring renovations. It combines the cost of the home and renovation expenses into one loan. Borrowers must meet specific credit score requirements and ensure that renovations are completed within six months.
FHA Energy Efficient Mortgage
This loan type allows borrowers to include energy-efficient upgrades in their FHA loan. It’s aimed at reducing utility costs and increasing the home’s environmental friendliness, thereby potentially increasing its value.
Section 245(a) loan
The Section 245(a) program is for borrowers expecting an increase in their income. It offers a graduated payment schedule that starts low and increases over time, aligning with anticipated income growth. This loan is particularly beneficial for young professionals expecting career advancement.
Check your FHA loan eligibility. Start here
FHA loan requirements
Homeownership can be a liberating experience, especially for first-time buyers. With their flexible guidelines and government backing, FHA home loans provide a welcoming path.
Understanding FHA loan requirements can make the process much easier, opening the door to a future in your ideal home.
Check your FHA loan eligibility. Start here
To be eligible for an FHA loan, applicants must adhere to specific guidelines:
The property must undergo a home appraisal by an FHA-approved appraiser.
The property must serve as the applicant’s primary residence; investment properties and second homes are not eligible.
Occupancy of the property is required within two months following the closing.
A mandatory inspection is conducted to ensure the property meets FHA’s basic standards.
There are a few more specific conditions to qualify, such as a down payment amount, mortgage insurance, credit score, loan limits, and income requirements.
FHA loan down payment requirements
FHA loans require a minimum down payment, which varies based on credit score. For credit scores of 580 and above, a minimum down payment of 3.5% is required. Borrowers with credit scores between 500 and 579 must make a 10% down payment.
FHA mortgage insurance premiums
FHA mortgage insurance premium (MIP) is what makes the FHA program possible. Without the MIP, FHA-approved lenders would have little reason to make FHA-insured loans.
There are two kinds of MIP required for an FHA loan. One is paid as a lump sum when you close the loan, and the other is an annual premium, which becomes less expensive each year as you pay off the loan balance:
Upfront Mortgage Insurance Premium (UFMIP) = 1.75% of the loan amount for current FHA loans and refinances
Annual Mortgage Insurance Premium (MIP) = 0.85% of the loan amount for most FHA loans and refinances
MIP is split into monthly payments that are included in your mortgage payment. You’ll have to pay FHA insurance for the life of the loan or if you refinance into another type of mortgage loan.
The good news is that, as a homeowner or home buyer, your FHA loan’s MIP rates have dropped. Today’s FHA MIP costs are now as much as 50 basis points (0.50%) lower per year than they were in previous years.
Also, you have ways to reduce what you’ll owe in FHA MIP.
Depending on your down payment and loan term, you can reduce the length of your mortgage insurance to 11 years instead of the entire loan.
Loan term
Original down payment
MIP duration
20, 25, 30 years
Less than 10%
Life of loan
20, 25, 30 years
More than 10%
11 years
15 years or less
Less than 10%
Life of loan
15 years or less
More than 10%
11 years
Or, you could refinance out of FHA MIP at a later date.
With FHA interest rates as competitive as they are today, refinancing could reduce your monthly mortgage payments and cancel your mortgage insurance premium if you have enough equity in the home.
Check your FHA loan rates. Start here
FHA loan credit score minimums
The minimum credit score requirement for an FHA loan is 500. However, a score of 580 or higher allows for a lower down payment. Credit scores directly impact loan terms and down payment amounts.
Debt-to-income ratio
FHA loans consider the borrower’s debt-to-income (DTI) ratio, a measure of monthly debt payments against monthly income. The FHA prefers a DTI ratio of no more than 43%, though exceptions can be made for higher ratios with compensating factors.
Income and employment requirements
There is no specific income threshold for FHA loans, but borrowers must demonstrate steady employment history. Verification includes pay stubs, W-2s, tax returns, and bank statements.
FHA loan limits
Loan limits for FHA loans vary by county. However, starting January 1, 2024, the new FHA loan limit will be $498,257 for a single-family home in most parts of the country. Limits increase for 2-, 3-, and 4-unit properties.
FHA loan rates
Interest rates for FHA loans are competitive and can vary based on factors such as prevailing market rates, borrower’s credit score, income, loan amount, down payment, and DTI ratio. Government backing often enables lenders to offer lower rates compared to conventional mortgages.
Compare your FHA loan rates from multiple lenders. Start here
Today’s rates for a 30-year, fixed-rate FHA loan start at % (% APR), according to The Mortgage Reports’ daily rate survey.
Thanks to their government backing, FHA loan rates are competitive even for lower-credit borrowers. But interest rates can vary a lot from one lender to the next, so be sure to shop around for your best offer.
FHA loan benefits
Check your FHA loan eligibility. Start here
1. Lower down payment: Just 3.5 %
For today’s home buyers, there are only a few mortgage options that allow for down payments of 5% or less. The FHA loan is one of them.
With an FHA mortgage, you can make a down payment as small as 3.5% of the home’s purchase price. This helps home buyers who don’t have a lot of money saved up for a down payment along with home buyers who would rather save money for moving costs, emergency funds, or other needs.
2. FHA allows 100% gift funds for the down payment and closing costs
The FHA is generous with respect to using gifts for a down payment. Very few loan programs will allow your entire down payment for a home to come from a gift. The FHA will.
Via the FHA, your entire 3.5% down payment can be a gift from parents or another family member, an employer, an approved charitable group, or a government homebuyer program.
If you’re using a down payment gift, though, you’ll need to follow the process for gifting and receiving funds.
3. FHA loans allow higher debt-to-income ratios
FHA loans also allow higher debt-to-income ratios.
Your debt-to-income ratio, or DTI, is calculated by comparing two things: your debt payments and your before-tax income.
For instance, if you earn $5,000 a month and your debt payment total is $2,000, your DTI is 40%.
Officially, FHA maximum DTIs are as follows.
31% of gross income for housing costs
43% of gross income for housing costs plus other monthly obligations like credit cards, student loans, auto loans, etc.
However, a 43% DTI is actually on the low end for most FHA borrowers. And FHA will allow DTI ratios as high as 50%. Although to get approved at such a high ratio, you’ll likely need one or more compensating factors — for instance, a great credit score, significant cash savings, or a down payment exceeding the minimum.
In any case, FHA is more lenient in this area than other mortgage loan options.
Most conventional mortgage programs — those offered by Fannie Mae and Freddie Mac — only allow debt-to-income ratios between 36% and 43%.
With down payments of less than 25%, for example, Fannie Mae lets you go to 43% DTI for FICOs of 700 or higher. But most people don’t get conventional loans with debt ratios that high.
4. FHA loans accept lower credit scores
Officially, the minimum credit scores required for FHA mortgage loans are:
580 or higher with a 3.5% down payment
500-579 with a 10% down payment
High credit scores are great if you have them. But past credit history mistakes take a while to repair.
FHA loans can help you get into a home without waiting a year or more for your good credit to reach the “excellent” level. Other loan programs are not so forgiving when it comes to your credit rating.
Fannie Mae and Freddie Mac (the agencies that set rules for conventional loans) say they accept FICOs as low as 620. But in reality, some lenders impose higher minimum credit scores.
5. FHA even permits applicants with no credit scores
What if an applicant has never had a credit account? Their credit report is, essentially, blank.
FHA borrowers with no credit scores may also qualify for a mortgage. In fact, the U.S. Department of Housing and Urban Development (HUD) prohibits FHA lenders from denying an application based solely on a borrower’s lack of credit history.
The FHA allows borrowers to build non-traditional credit as an alternative to a standard credit history. This can be a huge advantage to someone who’s never had credit scores due to a lack of borrowing or credit card usage in the past.
Borrowers can use payment histories on items such as utility bills, cell phone bills, car insurance bills, and apartment rent to build non-traditional credit.
“Not all lenders who are FHA approved offer these types of loans, so check with your loan officer individually,” cautions Meyer.
6. FHA loans can be up to $ in most of the U.S.
Most mortgage programs limit their loan sizes, and many of these limits are tied to local housing prices.
FHA mortgage limits are set by county or MSA (Metropolitan Statistical Area), and range from $ to $ for single-family homes in most parts of the country.
Limits are higher in Alaska, Hawaii, the U.S. Virgin Islands, and Guam, and also for duplexes, triplexes, and four-plexes.
7. FHA also allows extended loan sizes
As another FHA benefit, FHA loan limits can be extended where home prices are more expensive. This lets buyers finance their home using FHA even though home prices have skyrocketed in certain high-cost areas.
In Orange County, California, for example, or New York City, the FHA will insure up to $ for a mortgage on a single-family home.
For 2-unit, 3-unit and 4-unit homes, FHA loan limits are even higher — ranging up to $.
If your area’s FHA’s loan limits are too low for the property you’re buying, you’ll likely need a conventional or jumbo loan.
8. If you have an FHA loan, you can lower your rate with an FHA Streamline Refinance
Another advantage for FHA-backed homeowners is access to the FHA Streamline Refinance.
The FHA Streamline Refinance is an exclusive FHA program that offers homeowners one of the simplest, quickest, and most affordable paths to refinancing.
An FHA Streamline Refinance requires no credit score checks, no income verifications, and home appraisals are waived completely.
In addition, via the FHA Streamline Refinance, homeowners with a mortgage pre-dating June 2009 get access to reduced FHA mortgage insurance rates.
Verify your FHA loan eligibility. Start here
FHA loan disadvantages
What is the downside to an FHA loan? Among the numerous benefits of FHA loans, there are certain disadvantages that potential borrowers should be aware of. These drawbacks can impact the overall cost and flexibility of the loan.
Here are the downsides that you should know about FHA home loans.
FHA loan mortgage insurance premiums
One of the primary drawbacks of FHA loans is the mandatory mortgage insurance premiums. These include an upfront premium at closing, generally 1.75% of the loan amount, and ongoing monthly payments. This additional cost can make FHA loans more expensive over the long term
Loan limits
One notable limitation of FHA loans is the lower loan limits compared to conventional loans, which can be restrictive for higher-income buyers. The FHA mortgage limit for a one-unit property ranges from $ to $ for single-family homes in most parts of the country, which may not be sufficient in areas with higher property values.
Strict property requirements
FHA loans come with stringent property requirements. The purchased home must be the borrower’s primary residence and must meet specific safety and condition standards. This requirement can limit the types of properties that qualify for an FHA loan.
FHA loan alternatives
Alternative loans, like USDA and VA loans, offer distinct advantages, such as no down payment requirements, but come with specific eligibility criteria. Understanding these alternatives ensures you make a well-informed decision about the type of mortgage that’s right for you.
Conventional 97
The Conventional 97 program comes with a down payment requirement of just 3%. It stands out due to the absence of income limits and mandatory home buyer education, making it accessible to a broader range of homebuyers.
Check your conventional loan eligibility. Start here
HomeReady Mortgage by Fannie Mae
The HomeReady mortgage program is designed for low- to moderate-income families, allowing a home purchase with only a 3% down payment. Furthermore, this program permits the entire downpayment and closing costs to be covered by gifts or grants, offering significant financial flexibility.
Freddie Mac Home Possible
The Home Possible loan is notable for its reduced mortgage insurance costs compared to other similar programs. With a 3% down payment requirement and lower ongoing costs, Home Possible is an attractive alternative for those looking to save on mortgage insurance.
USDA loans
USDA loans, backed by the U.S. Department of Agriculture, are an attractive alternative, especially for moderate-income buyers in rural areas. They don’t require a down payment, which is a significant advantage. However, eligibility for USDA loans is restricted based on income and geographical limits, and not every property qualifies for this type of financing.
VA loans
VA loans are another viable alternative, particularly for U.S. military service members, veterans, and certain surviving spouses. Like USDA loans, VA loans also require no down payment. However, eligibility for VA loans is exclusive to the military community, limiting their accessibility to the general public.
FAQ: FHA loans
Can I choose between a fixed rate and an adjustable-rate FHA loan?
Yes, FHA loans offer both fixed-rate and adjustable-rate (ARM) options. A fixed-rate FHA loan provides a consistent interest rate and monthly payment for the life of the loan, ideal for those who prefer stability. An adjustable-rate FHA loan, on the other hand, has an interest rate that can change over time, typically offering lower initial rates.
Do FHA loans have lower interest rates?
FHA loans often have lower interest rates compared to many conventional loan options. This is largely due to the government backing of FHA loans, which reduces the risk for lenders. As a result, lenders are generally able to offer more competitive mortgage rates to borrowers. However, the actual interest rate you’ll receive on an FHA loan can vary based on several factors, including your credit score, loan amount, and the current market conditions. It’s always a good idea to compare rates from multiple lenders to ensure you’re getting the best deal possible for your situation.
Are FHA loans assumable?
Yes. A little-known FHA benefit is that the agency will allow a home buyer to assume the existing FHA mortgage on a home being purchased. The buyer must still qualify for the mortgage with its existing terms but, in a rising mortgage rate environment, it can be attractive to assume a home seller’s loan. Five years from now, for example, a buyer of an FHA-insured home could inherit a seller’s sub-3 percent mortgage rate. This can make it easier to sell the home in the future.
Can you buy a rental property with an FHA loan?
While you can’t buy a true rental property with an FHA loan, you can buy a multi-unit property — a duplex, triplex, or fourplex — live in one of the units, and rent out the others. The rent from the other units can partially, or even fully, offset your mortgage payment.
Are closing costs higher for FHA loans?
Closing costs are about the same for FHA and conventional loans with a couple of exceptions. First, the appraiser’s fee for an FHA loan tends to be about $50 higher. Also, if you choose to pay your upfront MIP in cash (instead of including this 1.75% fee in your loan amount), this one-time fee will be added to your closing costs. Additionally, the fee can be rolled into your loan amount.
What credit score do I need for an FHA loan?
Most borrowers will need a minimum credit score of 580 to get an FHA loan. However, home buyers who can put at least 10% down are eligible to qualify with a 500 score. Yet, each lender may have their own credit score minimums, separate to those established by the Federal Housing Administration.
What is the loan-to-value ratio requirement for FHA loans?
The loan-to-value (LTV) ratio for FHA loans typically cannot exceed 96.5%, meaning you can borrow up to 96.5% of your home’s value. This high LTV ratio is part of what makes FHA loans accessible, especially for first-time homebuyers who might not have substantial savings for a down payment.
How does PMI work with FHA loans?
For FHA loans, the equivalent of private mortgage insurance (PMI) is the mortgage insurance premium (MIP). MIP is required for all FHA loans, regardless of the down payment or loan-to-value ratio. This insurance protects lenders from losses in case of borrower defaults and is included in both upfront and ongoing mortgage costs.
What happens if I default on an FHA loan?
If you default on an FHA loan, the lender can initiate foreclosure proceedings. The FHA loan program, backed by the Federal Housing Administration, is designed to minimize the risk of defaults by offering more lenient qualification criteria. However, consistent failure to make mortgage payments may lead to foreclosure, impacting your credit score and homeownership status.
Today’s FHA loan rates
Now is an opportune time to consider an FHA loan, with current mortgage rates being historically competitive.
FHA loan interest rates are typically among the most competitive. To capitalize on these favorable rates, start by comparing offers from FHA-approved lenders.
Finding the most affordable loan could be just a few clicks away. Begin your journey towards homeownership today by exploring your options and discovering the best rates available for your financial situation.
Time to make a move? Let us find the right mortgage for you
Homebuyers looking to escape the hustle and bustle of city life may long for a quieter life in the country. But anytime you’re considering making a major lifestyle change, finances can become an issue.
If this sounds like you, you may be able to qualify for a USDA loan. This government-sponsored loan program focuses on houses located in designated rural and suburban areas.
What is a USDA home loan?
A USDA home loan is a type of mortgage for eligible rural and suburban homebuyers. It’s offered by the United States Department of Agriculture. USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program.
One of the biggest draws of the Rural Development program is that it doesn’t require any down payment. So, you can purchase your own home with a minimal amount of cash.
If you think this sounds like a good opportunity, you may be right. Keep reading to find out the benefits of applying for a USDA loan.
What are the different types of USDA loans?
The USDA offers three main mortgage programs for people who want to buy or repair a single-family home in a rural area:
USDA Direct Loans: Also known as Section 502 direct loans, these loans are issued to qualifying low-income borrowers with interest rates as low as 1% with certain subsidies and no down payment is typically required.
USDA Guaranteed Loans: Also known as the Section 502 Guaranteed Loan Program, these loans are issued by USDA-approved lenders and offer 100% financing, low interest rates, and minimal down payments to eligible buyers.
USDA Home Improvement Loans: Also known as the Section 504 Home Repair program, these loans are given to qualified homeowners to repair, improve, or modernize their homes. They’re also given to low-income elderly homeowners to remove health and safety hazards. The home improvement loan is up to $$40,000 and grants are also available up to $10,000. Additionally, loans and grants can now be combined for up to $50,000 in assistance.
USDA Streamline Refinance: Those with an existing USDA loan may be able to take advantage of lower rates with a USDA refinance loan. For those who qualify, the USDA streamline refinance is an attractive option as it does not require a home appraisal or income documentation. However, to be eligible, you must already have a USDA loan.
How much can I borrow with a USDA loan?
The majority of loans offered by the U.S. Department of Agriculture (USDA) do not feature loan limits. Direct Loans are the only type of USDA loans with specific limits, but they are a small portion of all USDA loans. Therefore, it is unlikely that you will find any limits on your USDA loan.
For the USDA Direct Loan program in 2024, the loan limit is 766,550 in most parts of the country. However, in more expensive high-cost areas, the loan limits are higher.
4 Benefits of a USDA Loan
Listed below are the four biggest advantages of taking out a USDA loan.
1. No down payment
For many people, the thought of scraping together a down payment is the most significant barrier to buying a home. But with a USDA loan, there’s no down payment required. In comparison, you’ll need a 3.5% down payment for FHA loans and a minimum 5% down payment for conventional loans.
2. Low private mortgage insurance (PMI)
Anyone who buys a home with no down payment must purchase private mortgage insurance (PMI). The costs vary, but PMI generally costs between 0.5% to 1.0% of the total loan amount.
With the USDA mortgage program, you still have to purchase PMI, but the rates are lower than they are with a conventional loan.
3. Low credit requirements
USDA loans also come with more flexible credit requirements than what other lenders look for. If your credit score is at least 640, your application should be approved pretty quickly. And the program is available for borrowers that are short on credit history.
4. Finance your closing costs
When you buy a home, the lender charges closing costs for issuing the loan. The closing costs usually fall between 2% and 5% of the total loan amount. So if you buy a $200,000 home, you can expect to pay at least $4,000 in closing costs.
When you take out a USDA loan, you can roll your closing costs into the loan financing. This means you can finance your closing costs instead of paying them out of pocket.
How do you qualify for a USDA loan?
Taking out a USDA loan doesn’t mean you have to move to the middle of nowhere. There are a wide variety of properties eligible for purchase through the USDA loan program.
While you won’t find any homes located in a major metropolitan area, you may be able to find some in certain suburban areas. But, of course, the most extensive selection is available in rural areas since the purpose of the program is to strengthen these communities.
To find out if a home you’re interested in qualifies, simply input the address into the USDA website. The USDA does have strict requirements the home must meet to be eligible for the program, which we’ll discuss in more detail below.
See also: First-Time Home Buyer Grants and Programs
USDA Loan Requirements
If you can’t qualify for a conventional loan, you may be eligible for either a USDA guaranteed loan or a USDA direct loan. Here is an overview of the borrower requirements for USDA home loan programs:
You must be a U.S. citizen, non-citizen national, or qualified alien.
The home must be located in an eligible location.
You must be purchasing the home as your primary residence.
The loan must be taken out through a USDA-approved lender.
You must be able to meet the minimum credit requirements.
Income limits
USDA loan programs are designed to help low to middle-income families, so borrowers must meet certain income limitations. To qualify, your household income cannot exceed 115% of the median income in your area.
The income requirements for USDA loans are determined by county, so you can check the USDA’s website to determine the requirements in your area. You can also work with a USDA-approved lender to determine your eligibility.
Property Eligibility
The U.S. Department of Agriculture also puts certain restrictions on the type of property you can buy with a USDA loan. Here are the types of properties that are eligible for a USDA mortgage loan:
Single-family homes
New construction homes
Townhomes and approved condos
Planned Unit Developments
Approved modular homes
What credit score do you need for a USDA loan?
If you’re applying for a guaranteed USDA loan, there are a few basic credit requirements you’ll need to meet. The USDA doesn’t set a minimum credit score requirement, but your application will get processed much faster if your credit score is at least 640.
A credit score below 640 doesn’t automatically rule you out, but your application will go through stricter underwriting guidelines. This is to ensure you can handle the monthly payments.
And you’re less likely to be approved if you have any collections on your credit report in the past 12 months. However, you may be granted an exception if you can prove that your credit was damaged because of a medical issue or something outside your control.
And finally, a USDA loan may be a viable option for you if you’re still in the process of building your credit scores. Your application may be approved even if you have a limited credit history if you can supply other credit references, like utility payments or rent payments.
USDA Income Limits
Income limits are set on all USDA loans to ensure the USDA loan program benefits low to middle-income families. These income restrictions are determined by various factors, including the median income for your local city or county. You can check your income eligibility to find out if you qualify.
The size of your family also helps determine your eligibility. If you have a large family, then it’s expected you’ll need a more substantial income to live on, and you’ll receive more leeway.
There are also different tiers of eligibility, depending on the type of USDA loan you’re taking out. For example, USDA guaranteed loans call for a moderate income, whereas USDA direct loans require applicants to fall in the low-income category.
Stable Income
Finally, you must have a stable monthly income to be eligible for a USDA loan. Usually, you need to show a history of stable employment for at least 24 months.
If you have questions about your eligibility, you can contact a mortgage lender that specializes in USDA loans. Just be sure to ask so you don’t waste your time working with a lender who doesn’t understand the nuances of USDA loans.
Real estate agents that work in a rural area may also be able to point you in the right direction, since they’re likely to have more experience with clients utilizing these programs.
Are there any other eligibility requirements?
This article is mainly focused on the USDA’s requirements, but keep in mind, the USDA isn’t lending you any money. Each lender can apply its own requirements as long as they meet the USDA’s basic guidelines. Your lender will want a complete financial picture, as well as your credit history and current employment status.
And one of the guidelines surrounds PITI, which stands for principal, interest, taxes, and insurance. Each of these things are combined to form your total monthly mortgage payment.
This amount can’t be more than 29% of your pre-tax monthly income. So if you make $3,000 per month, your total monthly payment would have to be less than $900.
Debt-to-Income Ratio
Another common requirement is known as your debt-to-income ratio. This is when the lender looks at compares your income to your total monthly debt payments. Ideally, your debt-to-income ratio shouldn’t be higher than 41%.
So if your income is $3,000 per month, your total monthly debt payments should be less than $1,230. And remember, your mortgage will be included in the total debt payments. But you may qualify for a higher debt ratio if your credit score is higher than 680.
Bottom Line
With a USDA mortgage, you can purchase your dream home without having to save up for a down payment. However, not everyone will qualify for this program.
If you’re interested in taking out a USDA loan, you should start by finding out if you meet the income restrictions in your county. And you might consider working with an experienced USDA lender to find out if you’re a suitable candidate for the program.
USDA Loan FAQs
How does a USDA loan work?
USDA loans provide low-interest home mortgages to qualified borrowers. These loans are issued by the United States Department of Agriculture, and are designed to help eligible borrowers purchase homes in rural areas and some suburban areas.
To qualify for a USDA loan, borrowers must typically meet certain income and credit requirements, as well as have a debt-to-income ratio that is lower than the national average. Once approved, the loan is typically issued in the form of a 30-year fixed-rate mortgage, with the interest rate set by the USDA. Borrowers can then use the funds to purchase a home and make mortgage payments over time.
What’s the difference between FHA, VA, and USDA Loans?
FHA loans are mortgage loans insured by the Federal Housing Administration that are available to homebuyers with less-than-perfect credit and relatively low down payments.
VA loans are mortgage loans guaranteed by the U.S. Department of Veterans Affairs that are available to qualifying veterans and military members with competitive terms and no down payment.
USDA loans are mortgage loans offered by the U.S. Department of Agriculture that are available to low-income borrowers in rural areas.
All three loan types require mortgage insurance, but the payment requirements vary.
What is the interest rate on USDA loans?
The interest rate on a USDA loan varies depending on the type of loan, the lender, the borrower’s credit score and other factors. Generally, USDA loan interest rates range from 1.00% to 4.00%.
The current interest rate for Single Family Housing Direct home loans is 3.75%. This fixed rate is based on current market rates at loan approval or loan closing, whichever is lower.
If payment assistance is applied, the interest rate can be as low as 1%. The payback period can be up to 33 years, or 38 years for very low-income applicants who can’t afford the 33-year loan term.
What are the fees associated with a USDA loan?
The upfront guarantee fee is 1% of the amount of the loan, and this fee must be paid at closing. This fee is non-refundable and is not included in the loan amount.
In addition to the upfront fee, there is an annual fee, which ranges from 0.35% to 0.50%. This fee is calculated as a percentage of the loan amount and is generally due each year.
USDA home loans also have other typical closing costs associated with them, such as appraisal fees, title fees, and recording fees.
Home loans for nurses come in various forms, specifically designed to cater to the unique needs of healthcare workers.
Beyond these specialized mortgage options, numerous local and national assistance programs can also offer financial help — like with down payments and closing costs.
Find the best home loan program for you. Start here
However, just because you’re a nurse doesn’t mean a specialized “nurse home loan” is best. You might find you can buy a home more easily with a standard mortgage program. So do your research and choose carefully.
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Are there special home loans for nurses?
Yes, there are special home loans for nurses that are designed to meet their unique financial and professional circumstances. These specialized mortgage options often come with benefits like lower interest rates, reduced down payments, and more flexible qualification criteria.
Additionally, there are grants for nurses and various local and national assistance programs that provide financial aid. These can be particularly helpful in covering down payments and closing costs, making the home-buying process more accessible, especially for nurses who are first-time homebuyers.
6 best home loans for nurses
When looking for the best home loan programs for nurses, it’s worth considering a mix of both specialized and standard options.
We recommend six mortgage programs in total—two are specialized home loans for nurses, while the other four are standard loan programs open to almost anyone. Surprisingly, you may find that a mainstream mortgage program, rather than a nurse-specific one, ends up being your best fit.
Find the best home loan program for you. Start here
To give a quick overview, the six best home loans for nurses are:
Nurse Next Door program
Homes for Heroes
Conventional mortgages
FHA mortgages
VA mortgages
USDA mortgages
Let’s dig into each program in a little more detail.
1. Nurse Next Door program
The Nurse Next Door1 program is not a “true” mortgage loan program. It does not lend money or originate loans. Rather, it’s a home buyer assistance program that will help match you with the right property, mortgage, and aid program for your needs (if required).
Nurse Next Door provides grants for nurses of up to $8,000 (where available) and down payment assistance of up to $10,681. You may also reduce closing costs by eliminating a home appraisal and other fees.
Keep in mind that grants are generally only awarded to nurses and medical professionals who are first-time buyers purchasing a primary residence. This means that you must refrain from using the funds for an investment property or vacation home.
Before you use this program, though, check that you can’t get more generous grants or loans from your state or local down payment assistance program.
2. Homes for Heroes: Healthcare professionals
Homes for Heroes2 is another nationwide homeowner assistance program that aims to make buying a new home more affordable for firefighters, law enforcement, teachers, military, and medical professionals.
The website says, “Most heroes save at least $3,000 when they buy or sell a home with us. When you add up savings from real estate agents, loan officers, title companies, home inspectors, and other everyday deals, the savings are way beyond what you’ll get from other national programs.”
Note that you must use real estate professionals recommended by Homes for Heroes to benefit. Again, check other local programs to ensure this is your best option before buying.
3. Conventional loans for nurses
Conventional mortgages are the most popular type of home loan available today. These loans are not backed by the government, like others on this list, but most conform to the rules laid down by Fannie Mae and Freddie Mac, which are two government-sponsored enterprises. This is why they’re also referred to as “conforming loans.”
Conventional loans require a credit score of 620 or better. But they offer a low down payment option of only 3% of the purchase price to qualify. Although, if your down payment is less than 20%, you’ll need to pay for private mortgage insurance (PMI), which means higher monthly payments.
4. FHA loans for nurses
Nurses and medical professionals with a credit score between 580 and 620 could opt for a mortgage backed by the Federal Housing Administration, an FHA loan. This type of loan is popular with first-time home buyers because of its flexible approval guidelines.
FHA loans also have a low down payment option of 3.5%. But you will have to pay mortgage insurance premiums (MIP) for the life of the loan. Note that MIP is different from private mortgage insurance on a conventional loan. Still, many FHA buyers simply refinance out of mortgage insurance down the road when their credit scores improve.
Consider opting for a conforming loan if you can. Because of those, you can escape mortgage insurance costs more easily and cheaply.
Verify your FHA loan eligibility. Start here
5. VA loans for nurses
Backed by the Department of Veterans Affairs, a VA loan is an option for nurses who have served or are still serving in the military. If you’re eligible, this will likely be your best bet.
Lenders set their own credit score thresholds, usually between 580 and 660. But you need no down payment. And you’ll be in line for a below-market interest rate, no private mortgage insurance, and low closing costs.
VA buyers must pay a one-time VA funding fee that is typically between 2.3% and 3.6% of the loan amount. However, many borrowers roll this fee into their loan balance, so they don’t have to pay it upfront.
Verify your VA loan eligibility. Start here
6. USDA loans for nurses
The US Department of Agriculture backs USDA mortgages. These, too, require no down payment. But you’ll likely need a score of 640 or better. Similar to the VA loan, a USDA mortgage frequently has lower interest rates than the “going” rate.
You must also meet household income limits and buy a home in a designated rural area. Some suburbs are included. Use the USDA’s maps to find out whether the place where you want to buy is eligible.
Find out if you qualify for a USDA loan. Start here
Grants for nurses
Most of the home loan programs for nurses we highlighted above can be used with down payment assistance (DPA) programs, which could help cover your down payment and closing costs.
Check your home buying options. Start here
All states and many cities and counties offer grants and DPA programs for first-time buyers. There are thousands of these across the country. In some places, you can get home buying assistance running into the tens of thousands of dollars.
Some of these down payment assistance programs offer special privileges to nurses and other essential workers. To find one that covers the area where you want to buy, read this article or check out your state’s page on the Department of Housing and Urban Development (HUD) website.
Note that each DPA sets its own eligibility requirements and caps the amount of money it will grant or lend you. So you’ll have to do a bit of research to find out what you could be in line for and whether you qualify.
Nurse home loans from private lenders
Some private mortgage lenders offer reduced closing costs or other perks for nurses. For example, Homes for Champions (RealFi Home Funding Corp.) says that it’s offering for nurses and doctors can save you “up to 2.00% to 3.00%” by eliminating many fees normally due on closing.
But this company is a licensed direct lender in only 13 states, plus Washington DC: CT, DE, FL, GA, MD, NC, NJ, NY, PA, SC, TX, and VA.
Find the best home loan program for you. Start here
Other companies or organizations also offer help to homebuyers who are nurses.
One such program is the Everyday Hero Housing Housing Assistance Fund. It seems that it refunds seller concessions negotiated by specialist real estate agents. You wouldn’t be alone in assuming that’s a scam. Although it has an A+ rating with the Better Business Bureau. So it may be worth checking out. Remember that seller concessions are hard to obtain in sellers’ markets, which most are at the time of this writing.
Meanwhile, Nurse Home Loan Programs says its goal is “to educate and connect our Nurses with the best home loan solutions for them all over the country.”
It might be worth talking to one of the company’s specialists if your applications are getting rejected. Because that does sometimes happen with lenders that don’t understand nurses’ special working conditions, such as overtime and differential income, or that struggle to grasp the challenges of high student debt and travel nurses’ seemingly chaotic employment records. (More on those and similar challenges below.)
How to overcome home buying challenges as a nurse
Qualifying for a mortgage as a nurse often comes with its own set of hurdles. Lenders are generally focused on income verification, but they may lack a comprehensive understanding of how the nursing profession is structured.
As a result, you might find yourself in the position of having to explain why nurses should be considered a special case in the mortgage application process.
Check your home buying eligibility. Start here
Here are some tips to help you qualify for a nurse home loan.
Nursing income for mortgages
Of course, your basic pay should count toward your qualifying income when applying for a mortgage. But it can become more complicated when it comes to overtime, shift differentials, and “extra” pay.
With those, lenders are likely to look back over the last couple of years to see your average gross pay. If you recently had a schedule change or took on more hours, that might not count toward your income right away.
For example, if you’ve only just started earning the higher hourly rate for night shifts, lenders are unlikely to consider that when deciding how much you can borrow. It might help to get your employer to write the lender, verifying that this will be a long-term arrangement.
You can also write an explanatory letter with your application, telling the lender why you think it should take more of your income into account. Sometimes, this strategy works. But not always.
Travel nurses
Travel nurses sometimes have to seek out lenders that understand their work.
You know that you can hop from contract to contract and agency to agency and never skip a beat, except when you choose to take a vacation. But to a lender, your employment record looks patchy and might suggest you can’t hold down a job.
Again, you can explain to lenders how your employment works. If one won’t listen, move on to those who will.
Student debt
As higher nursing qualifications become more valuable, many nurses take on high levels of student debt. That can affect your home-buying budget because of your debt-to-income ratio (DTI).
Lenders worry that borrowers cannot comfortably afford their mortgage payments and other homeownership costs if they have too many other debts. Unfortunately, student loans can compound that debt burden.
There are ways to drive down your DTI, including paying off big monthly debts with small balances. For example, if your auto loan payments are high but you’ve nearly paid them off, get rid of them before applying for your mortgage.
Nurse.org has an excellent article that goes into more detail about applying for a mortgage as a nurse. And it covers most of what we’ve said and more. You can learn more here.
Listen to The Ask Nurse Alice Podcast!
How to choose the right home loan for nurses
Finding the ideal mortgage is an important step in the home-buying process, and for nurses, this choice may be affected by a number of factors.
While there’s no one-size-fits-all answer, the best home loan for nurse practitioners will depend on individual circumstances such as credit score, down payment, and even military service.
Check your home buying eligibility. Start here
When should nurses consider a VA loan?
If you have served or are currently serving in the military, either as a nurse or in another capacity, a VA loan is likely your best option.
VA loans come with several benefits, including no down payment and no private mortgage insurance (PMI), making them an attractive choice for those who qualify.
When should a nurse choose a conventional loan?
For nurses who have never served in the military but have a good credit score and a decent down payment, a conventional loan is often the next best option.
These loans typically offer competitive interest rates and may require a lower down payment compared to other loan types.
When should nurses use an FHA loan?
If your credit score falls within the 580–619 range, an FHA loan might be your best bet. The Federal Housing Administration is backing these loans, which are more forgiving of lower credit scores.
However, they do require an upfront mortgage insurance premium and ongoing monthly premiums.
When should a nurse choose a USDA loan?
Lastly, for nurses and eligible healthcare workers with limited savings who are looking to buy in a rural area, a USDA loan could be the perfect fit, provided your household income meets the eligibility criteria.
These loans offer 100% financing, meaning no down payment is required, and they also have lower mortgage insurance costs.
FAQ: Home loans for nurses
Do nurses get discounts on mortgages?
Yes, there are special home loan programs for nurses that offer discounts on mortgages. These programs are designed to assist healthcare professionals like registered nurses, nurse practitioners, and even travel nurses in buying a home. The discounts may vary by state and lender, so it’s a good idea to shop around and inquire about home loan assistance for nurses.
Is it easier for nurses to get a mortgage?
While nurses may have stable incomes, the mortgage application process can be complex due to the unique structure of nursing pay, which often includes overtime and shift differentials. Travel nurses may face additional hurdles as their employment can appear inconsistent to lenders. However, there are home loan programs for nurse practitioners that offer relaxed qualification criteria, making the mortgage application process more straightforward.
Do nurses get better interest rates?
While various factors, such as credit score and debt-to-income ratio, affect interest rates, nurses may be able to obtain better interest rates through specialized home loan programs. These programs may offer competitive rates as part of the package. It’s advisable to consult with different lenders to find the best loan type in terms of interest rates.
Can I get a mortgage as a new nurse?
Absolutely, you can get a mortgage as a new nurse. Many lenders offer home loan programs for nurses that don’t require a long employment history in the field. However, you may need to provide proof of employment and your nursing license. If you’re a first-time home buyer, there are also specific loans tailored to your needs, like first-time home buyer loans for nurses.
Are there home loans for nurses?
Yes, there are home loans for nurses with bad credit. While having a lower credit score can be a hurdle in the mortgage application process, certain programs are designed to help nurses overcome this challenge. FHA loans, for example, are more forgiving of lower credit scores and may be a suitable option if your credit falls within the 580–619 range. Additionally, some specialized nurse home loan programs offer more flexible qualification criteria, which can be beneficial for those with less-than-perfect credit. It’s always a good idea to consult with a mortgage advisor to explore all your options.
What are today’s mortgage rates?
Nurses can often find excellent deals when they take advantage of healthcare-oriented mortgage and assistance programs.
But don’t stop at finding the right loan program. You should also shop around for the best mortgage lender.
Each lender you apply to will probably present you with a different set of mortgage rates and closing costs. So get quotes from several and pick the one with the best deal for you.
Time to make a move? Let us find the right mortgage for you
An FHA loan is a mortgage insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. With a minimum 3.5% down payment for borrowers with a credit score of 580 or higher, FHA loans are often a good fit for first-time home buyers or people with little savings or credit challenges.
You could still qualify for an FHA loan even if you don’t meet the requirements for a conventional mortgage or if you had a bankruptcy.
The federal government doesn’t issue FHA loans, but it does insure them. That insurance protects lenders in case of default, which is why FHA lenders are willing to offer favorable terms to borrowers who might not qualify for a conventional home loan.
FHA loans are issued by private, FHA-approved lenders, including many banks, credit unions and nonbanks (a type of lender).
An FHA home loan can be used to buy or refinance numerous types of homes, including:
Specific types of FHA loans can also be used to finance new construction or renovate an existing home. However, all properties — existing or new construction — must undergo an FHA appraisal. If the property meets government standards, then you can use an FHA loan to buy (or refinance) it.
Mortgage loans from our partners
FHA vs. conventional loans
In general, it’s easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn’t insured or guaranteed by the federal government.
Here are some key differences between FHA and conventional loans:
Credit score and history: FHA loans allow for lower credit scores than conventional loans. If you’ve had credit problems (including bankruptcy), you might find it easier to qualify for an FHA loan.
Mortgage insurance: Unlike conventional loans, all FHA loans require mortgage insurance. (However, the amount you pay varies based on the size of your down payment.) With a conventional loan, mortgage insurance generally isn’t required if you make a 20% down payment or once you reach 20% equity in your home.
Gift funds for down payments: FHA rules are more flexible regarding monetary gifts from family, employers or charitable organizations you can apply to your down payment.
FHA appraisal: To qualify for an FHA loan, the property must undergo an appraisal to make sure it meets government standards for health and safety. An FHA appraisal is different and separate from a home inspection. Conventional loans don’t require this.
Closing costs: FHA loans may involve closing costs that aren’t required by conventional loans.
FHA loan requirements
The FHA sets minimum requirements for borrowers seeking an FHA loan. However, each FHA-approved lender can determine its own underwriting standards, so long as those requirements are in line with the minimums set by the FHA. For instance, one lender may require a minimum credit score of 600 and another a minimum of 620.
Lenders each set their own interest rates and fees, too. To make sure you get the best FHA mortgage rate and loan terms, shop more than one FHA-approved lender and compare offers.
In general, here are the basic requirements to expect when applying for an FHA loan.
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Credit score for FHA loans
According to the FHA, the minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can qualify for an FHA loan, but you’ll need to make a down payment of at least 10%.
If your credit score is 580 or higher, you can qualify for a down payment as low as 3.5%.
Again, these are FHA guidelines; individual lenders can and often do opt to require a higher minimum credit score.
🤓Nerdy Tip
If your credit score doesn’t measure up, you may want to work on building your credit before you begin home shopping. When you’re ready, find a lender that specializes in FHA loans. These lenders might be more experienced at working with credit-challenged borrowers.
Debt-to-income ratio
Your debt-to-income ratio, or DTI, is a measure of your monthly debt payments in relation to your pretax income. That includes your rent or mortgage costs in addition to things like auto or student loans and credit card balances. In general, lenders view a lower DTI as more favorable when issuing loans.
DTI requirements for FHA loans differ based on your credit score and other compensating factors, such as how much cash you have in the bank. If you have a credit score from 500 to 579, the FHA generally requires a DTI of less than 43%.
It’s still possible to get an FHA loan with a DTI that’s higher than 50%, but you’ll have to meet compensating factors, and your options will be limited.
Down payments and gift funds
The minimum down payment required for an FHA loan is 3.5% if you have a credit score of 580 or higher. If you have a credit score from 500 to 579, you’ll have to put down at least 10% of the purchase price.
The good news? It doesn’t all have to come from savings. You can use gift money for your FHA down payment, so long as the donor provides a letter with their contact information, their relationship to you, the amount of the gift and a statement that no repayment is expected.
🤓Nerdy Tip
Look into state and local down payment assistance programs for first-time home buyers, usually defined as someone who has not owned a home within the past three years. You may be able to find low- or no-interest loans, or even grants, to help you pull together the cash.
FHA appraisal
The property you’re trying to buy with an FHA loan has to undergo an appraisal from an FHA-approved professional and meet FHA minimum property requirements.
The FHA appraisal is separate and different from a home inspection. The goal is to be sure the home is a good investment — in other words, worth what you’re paying for it — and ensure it meets basic safety and livability standards.
For an FHA 203(k) renovation loan, the property may undergo two appraisals: an “as is” appraisal that assesses its current state and an “after improved” appraisal estimating the value once the work is completed.
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Mortgage insurance
FHA mortgage insurance is built into every loan. When you first get an FHA mortgage, you’ll make an upfront mortgage insurance payment, which can be rolled into the total amount of the loan. Then, you make monthly mortgage insurance payments thereafter. The length of your monthly payments varies based on the size of your down payment.
If your down payment is less than 10%: You will pay FHA mortgage insurance for the life of the loan.
If your down payment is 10% or more: You will pay FHA mortgage insurance for 11 years.
With a conventional loan, you can cancel private mortgage insurance once you reach 20% equity in your home. FHA mortgage insurance can’t be canceled in the same way.
🤓Nerdy Tip
Once you have enough home equity, you could choose to refinance your FHA loan into a conventional loan. This would remove the FHA mortgage insurance requirement, but you’d have to meet new qualifications and pay additional closing costs and fees.
Types of FHA loans
The FHA offers a variety of loan options, from standard purchase loans to products designed to meet highly specific needs. A full list of all FHA loan products and eligibility requirements is available at HUD.gov. Here are some common options:
Home purchase: Basic Home Mortgage 203(b)
The Basic Home Mortgage 203(b) is the standard single-family home loan backed by the FHA. Only primary residences — not vacation or second homes — qualify for FHA-insured loans.
FHA refinance loans
You may want to refinance your FHA loan to lower your interest rate, shorten your mortgage term or get cash flow for a costly project, such as a home renovation. Options include:
FHA streamline refinance: This can save you time and paperwork because it doesn’t require a new appraisal.
FHA cash-out refinance: This loan replaces your current mortgage with a new, larger loan. The difference is paid to you in cash.
FHA 203(k) refinance: This loan lets you roll the cost of repairs or renovations into the total amount of your mortgage. Upgrades must meet FHA eligibility requirements.
FHA renovation loans
FHA 203(k) rehabilitation mortgages: This option helps borrowers finance fixer-uppers by rolling purchase and renovation costs into one loan. The standard 203(k) loan lets borrowers finance improvements over $5,000. The FHA limited 203(k) loan lets borrowers finance improvements up to $35,000.
Title 1 Property Improvement Loans: These loans are also available to finance home repairs and improvements. Homeowners can obtain this loan without refinancing their existing mortgage, and the funds can be used to supplement a 203(k) loan. However, you can borrow only up to $25,000 for a single-family home.
Other specialty FHA loans
Energy-efficient mortgages: An energy-efficient mortgage can be used to finance home improvements to help a home save energy. To qualify for this financing, the home must undergo an energy assessment from a qualified professional.
Construction-to-permanent loans: This loan type helps borrowers finance the purchase of a home that’s still being built by paying the contractor in installments. When the home is finished, the loan converts to a permanent mortgage. Qualifying for these types of loans can be more difficult and time-consuming than a traditional purchase mortgage.
Manufactured homes: This includes the type sometimes called a mobile home. Manufactured homes can be bought with FHA financing, so long as everything meets HUD requirements. For example, HUD mandates that a manufactured home is at least 400 square feet, and it must be designed to use as a dwelling attached to a permanent foundation.
FHA loan limits
No matter what type of FHA loan you’re seeking, there will be limits on the mortgage amount. These limits vary by county. FHA loan limits in 2024 range from $498,257 to $1,149,825.
Low-cost county limit: The upper limit for FHA loans on single-family homes in low-cost counties is $498,257. An example is Lucas County, Ohio, where Toledo is located.
High-cost county limit: The upper limit for FHA loans in the highest-cost counties is $1,149,825, which would include mortgages in San Francisco County, California, for example.
Some counties have housing prices that fall somewhere in between, so the FHA loan limits are in the middle, too. An example is Denver County, Colorado, where the 2024 FHA loan limit is $816,500. You can visit HUD’s website to look up the FHA loan limit in any county.
How to apply for an FHA loan
Applying for an FHA loan will require personal and financial documents, including but not limited to:
A valid Social Security number.
Bank statements for, at a minimum, the past 30 days. You’ll also need to provide documentation for deposits made during that time, such as pay stubs.
Your lender may be able to automatically retrieve some required documentation, like credit reports, tax returns and employment records. Special circumstances — such as if you’re a student or you don’t have a credit score — may require additional paperwork.
Pros and cons of FHA loans
An FHA loan might be your best option for homebuying if you have credit challenges. Still, it’s important to understand the trade-offs.
Benefits of FHA loans
Lower minimum credit score requirements than conventional loans.
Down payments as low as 3.5%.
Debt-to-income ratios as high as 50% allowed (in some cases, may be higher if you meet compensating factors).
Disadvantages of FHA loans
FHA mortgage insurance lasts the full term of the loan with a down payment of less than 10%.
Property must undergo a separate appraisal and meet strict health and safety standards, which some sellers will consider an added hurdle.
No jumbo loans: The loan amount cannot exceed the conforming limit for the area.
Though the FHA sets standard requirements, FHA-approved lenders’ requirements may be different.
FHA interest rates and fees also vary by lender, so it’s important to comparison shop. Getting a mortgage preapproval from more than one lender can help you compare the total cost of the loan.
Ways to get the best FHA mortgage rates
When you’re shopping for an FHA loan, it’s smart to make sure your financials are in as good a shape as possible. This means pulling your credit reports from the three main credit reporting agencies — Experian, Equifax and TransUnion — and addressing any errors you might find. If possible, you might also pay down any larger balances, which has the added benefit of improving your debt-to-income ratio. While FHA loans might have more lenient requirements than some other loan types, having a better credit score and DTI will likely net you a better rate.
FHA loans are notable for requiring low down payments, but if you’re able to make one that’s higher than the minimum, you’ll look like a safer candidate to lenders. This is also likely to get you lower rate offers.
Once you feel confident about your application, compare mortgage rates between at least three FHA lenders. Even small differences in the rate you pay could save you — or cost you — thousands of dollars over the term of a home loan. And while you’re comparing lenders, look into first-time home buyer programs offered by your state’s housing authority. Many of these nonprofit agencies offer down payment and closing cost assistance in the form of grants.
Military service to your country is rewarded with an exclusive benefit to foster homeownership. A VA loan is unlike any other mortgage on the market, offering a home loan with no down payment, limited closing costs, and no private mortgage insurance.
However, VA loans are offered only to those who have served in the military.
It’s a well-deserved and valuable advantage to maximize home affordability, especially for a first-time home buyer. This is how the program works and what it takes to qualify for a VA home loan in 2024.
Read more: How to buy a house in 2024
What is a VA home loan?
VA loans are issued by private mortgage lenders, including banks, credit unions, or mortgage providers, but are administered by the Department of Veterans Affairs, which guarantees a portion of the loan. That guarantee allows lenders greater flexibility in structuring the loan terms used to finance the purchase of a single-family home, condominium, multi-unit property, manufactured house, or new construction.
Current service members, veterans, and eligible surviving spouses may qualify for a VA loan.
Read more: How much house can I afford?
How a VA loan works
Most (90%) VA home loans are made without a down payment. The VA doesn’t require a down payment, but lenders can add loan requirements to manage their credit risk. It’s the same with credit scores: The VA doesn’t set a minimum qualifying credit score for a home loan, but lenders often do.
Tip: These “lender overlays” — qualifying requirements beyond those specified by a guarantor — are a primary reason for borrowers to shop multiple lenders. According to the CFPB, borrowers could save $100 a month or more by shopping for the best mortgage deal.
Read more: What all the best mortgage lenders have in common
Generally, the benefits of a VA loan for a borrower with full entitlement include:
No down payment.
No loan limit.
Fewer closing costs. Lenders are limited to the amount they can charge, and according to the VA, closing costs “may be paid by the seller, lender, or any other party.”
No private mortgage insurance (PMI).
The flexibility to purchase and fund repairs that are completed after closing.
The VA funding fee
One cost unique to a VA loan that shouldn’t be overlooked is the VA funding fee. It is not insignificant and can blindside a borrower.
The VA funding fee is typically 1.40% to 2.30% of the loan amount for the first-time use of a purchase loan. It can be paid in cash at closing, financed as part of the loan, or paid by the lender or home seller as a concession.
There can be exemptions for the payment of the funding fee, including for certain veterans with a service-connected disability and for some unremarried surviving spouses of veterans.
Read more: Why a mortgage pre approval matters so much in 2024
How to qualify for a VA loan
Lenders may stipulate how much you can borrow, but the VA does not have specified loan limits for borrowers with a full entitlement. And while there is no minimum-income requirement, the VA needs proof that you will have “income remaining after paying your mortgage and other financial obligations.”
The home being financed must be your primary residence, and you must meet one of the following:
An active-duty service member. The minimum active-duty-service requirements depend on when you served.
A veteran of the armed forces, including Reserve and National Guard members.
An eligible spouse.
There are quite a few qualifiers to the above standards. Here is a complete list of service requirements. Even if it seems you don’t meet the minimum-service requirements, be sure to examine the details of active-service and veteran qualifications.
Particular circumstances of a discharge can also qualify you for a VA loan.
Certificate of Eligibility (COE)
You will need to provide proof of your qualifications for a VA mortgage. That is supplied with a Certificate of Eligibility. Approved VA lenders will have access to an online tool that can provide the information within minutes. You can also get a COE online at VA.gov or submit a VA Form 26-1880 via mail.
Lender loan requirements
Specific loan-eligibility requirements vary by lender, but generally, VA loans require a borrower to:
Meet a minimum credit score requirement. The VA does not set this, and it varies by lender. While FICO 620 is often mentioned as the preferred entry-level credit score, Yahoo Finance found minimum credit scores at a sampling of major VA lenders to be 550, 580, and 600.
Fall within certain debt-to-income limits. The VA also doesn’t mandate a maximum debt-to-income ratio, but lenders often look for a DTI of less than 50%.
Read more: The credit score needed to buy a house in 2024
Pros and cons of VA loans
Pros
No down payment is required.
You have the option to use an adjustable rate mortgage.
No PMI.
Closing costs are capped and some fees may be paid by others.
As high interest rates and housing prices weigh down potential home buyers, the Neighborhood Homes Investment Act could be on the way to help.
The proposed federal initiative would enable better affordability for home buyers by injecting $16 billion for adding more housing stock to the market and $10.1 billion for down payment assistance.
While it still needs to pass all three branches of government, it’s helpful to understand the legislation if it gets signed into law. Here’s what you need to know.
Check your home buying eligibility. Start here
What is the Neighborhood Homes Investment Act?
Introduced in 2023, the Neighborhood Homes Investment Act (NHIA) is a bipartisan bill aiming to boost housing affordability through increased development and down payment assistance.
As it currently stands, it would devote $16 billion toward the building and rehabilitation of an estimated 400,000 homes, according to a White House statement. The proposal would also allocate $10 billion in down payment assistance and a $100 million pilot program to supplement opportunities for first-generation and/or low wealth first-time homebuyers.
Verify your home buying eligibility. Start here
“Everyone deserves a safe and affordable place to call home. Our bipartisan tax credit will drive housing investments and revitalize neighborhoods … while keeping them affordable for low- and moderate-income families,” Senator Ben Cardin (D-Md.) said in a press release. “This credit will allow individuals in these communities to build equity and wealth for their families.”
The ongoing dearth of available for-sale properties has held back the entire housing market. Coupled with the rapid mortgage rate growth from 2023, fewer borrowers can afford homeownership and fewer homeowners want to sell.
“The number of homes that are available for sale is the lowest or close to the lowest it’s ever been,” said Mortgage Bankers Association Deputy Chief Economist Joel Kan. “A lot of that has been driven by the lock-in effect — many borrowers have lower mortgage rates than what’s being offered right now, so they’re just not willing to sell or list their homes.”
Has the Biden Neighborhood Homes Investment Act been passed?
As of November 2023, the Biden Neighborhood Homes Investment Act has not been passed, so the funding is not yet available.
Congress still needs to approve the proposed legislation before the President signs it into law. There is no set timeline for the act to pass. It is possible that it could be passed in the near future, but it is also possible that it could be delayed or even defeated in the process.
Other policies in the legislative pipeline
Even more federal help for borrowers could potentially be on the way as well. Similar to the NHIA, two other notable bills intended to help home buyers hang in bureaucratic limbo.
The First-Time Home Buyer Tax Credit would provide up to $15,000 in refundable tax credit to first-time borrowers. As long as the house isn’t sold within four years, the credit won’t need to be repaid. The second is the Downpayment Toward Equity Act. If signed into law, this would give eligible first-time home buyers a $25,000 cash grant to put toward their purchase.
Help for first-time home buyers
Buying property is a major milestone and often the largest financial decision people make.
Check your home buying options. Start here
While these proposed bills could potentially alleviate some affordability issues, plenty of helpful solutions already exist if you’re in the market to buy your first home. These come in the form of state assistance programs and special mortgages.
First-time home buyer mortgages
First-time home buyer loans are specifically designed with more favorable terms for the borrower, aimed to make homeownership more attainable.
Below is a quick rundown of these loans and their base qualifications:
Program
Minimum Credit Score
Down Payment Requirement
Other Requirements
FHA Loans
580 (with 3.5% down)
3.5%-10%
Mortgage insurance is required. Property must meet certain standards
Conventional 97
620
3%
At least one borrower must be a first-time home buyer. Private Mortgage Insurance may be required
Home Possible
660
3%
Income limits apply. Homeownership education required
HomeReady
620
3%
Income limits apply. Homeownership education required
USDA Loans
640
0%
Must be in a USDA-eligible rural area. Income limits apply
VA Loans
Varies by lender
0%
Available to veterans, active-duty service members, and certain members of the National Guard or Reserves
Broken down on a more local level, every state offers its own first-time home buyer program. These programs are customized to their markets, fitting the needs of the buyers within them.
Verify your low-down-payment loan options. Start here
Down payment assistance programs
Additionally, down payment assistance (DPA) can provide a big hand in clearing the financial hurdles to homeownership. The best part is you don’t necessarily need to be a first-time buyer to qualify for some DPA programs.
Every state has its own DPA to potentially take advantage of, found through local housing agencies, lenders, and city and state websites.
Explore your options
The housing market would get a much needed inventory boost if the Neighborhood Homes Investment Act gets passed. It would also inject more capital into down payment assistance programs for first-time home buyers.
In the meantime, those looking to buy their first home can and should still explore their loan options and see what financial assistance they may qualify for. Following a step-by-step guide for first-time home buying can also help you set expectations and get everything you need in order.
If you’re ready to begin your path to homeownership, contact a local lender today.
Time to make a move? Let us find the right mortgage for you
Mortgage activity picked up for a third straight week, with growth observed among first-time buyers, the Mortgage Bankers Association said
The MBA’s Market Composite Index, a measure of weekly application volumes based on surveys of trade groups members, climbed up a seasonally adjusted 3% for the seven-day period ending Nov. 17. The latest increase comes after similar rises of 2.8% and 2.5% earlier this month. Despite the recent upswing, applications still were 16.3% lower compared to the same week in 2022.
“Mortgage applications increased to their highest level in six weeks, but remain at very low levels,” said Joel Kan, MBA vice president and deputy chief economist, in a press release.
Applications have headed upward over the past few weeks as interest rates began easing. A better-than-expected October inflation report alleviated some economic angst, with data pointing to a softening economy, according to Kan.
Following the release of the inflation report, the 30-year fixed conforming average among MBA lenders finished last week at 7.41%, taking a 20 basis point dive compared to 7.61% in the previous survey. Points used by borrowers to pay down the interest rate dropped to 0.62 from 0.67 for 80% loan-to-value ratio applications.
The effect of lower rates contributed to a seasonally adjusted 3.9% jump in the Purchase Index week over week, with both conventional and government volumes increasing. But with limited inventory still suppressing demand, activity remained 20.6% below year-ago levels.
Still, recent trends show glimmers of potential momentum in the home buying market. Pending sales over the past month based off of Redfin’s analysis of listings rose to its highest point in almost a year. Existing-home sales also ticked up on a monthly basis in October, according to the National Association of Realtors, despite remaining at historical lows.
Much of the recent growth is driven by first-time buyers, according to the MBA. “The average loan size on a purchase application was $403,600, the lowest since January 2023. This is consistent with other sources of home sales data showing a gradually increasing first-time home buyer share,” Kan said.
Purchase loans guaranteed by the Federal Housing Administration, which are frequently used for starter homes, surged a seasonally adjusted 6.7%.
The MBA’s reported mean purchase amount declined 0.7% from the prior week’s $406,600, and with the exception of 2023’s first application survey, has remained above the $400,000 mark all year. The average refinance-application size also clocked in at its lowest this year, inching down 2.3% to $241,200 from $247,000 a week earlier. The overall average across all applications, likewise, fell to its lowest mark since January, finishing at $351,000, 1.3% lower from $355,700 seven days earlier.
Meanwhile, the MBA’s Refinance Index edged up 1.6% but sat 3.7% lower on an annual basis. The share of refinances relative to total activity grew to 32.4% from 31.9% the previous week.
Led by growth in FHA-backed purchases last week, the share of government-market lending grew correspondingly. Loans guaranteed by the FHA garnered 14.8% of all applications compared to 14.4% a week earlier. The volume of mortgages taken through the Department of Veterans Affairs saw a more muted increase, inching up to 11.3% of activity from 11.2%. Applications sponsored by the U.S. Department of Agriculture pulled back to a 0.4% share from 0.5% the week prior.
Similar to the conforming 30-year rate, all other fixed averages tracked by the MBA decreased last week. The contract rate of the 30-year jumbo loan dropped 14 basis points to 7.51% from 7.65% in the previous survey. Borrower points decreased to 0.62 from 0.67.
The contract average of the 30-year FHA-guaranteed mortgage saw a 17 basis point decline, descending to 7.19% from 7.36% week over week. Points also dropped down to 0.69 from 0.75 for 80% LTV-ratio loans.
The 15-year fixed-rate mortgage averaged 6.89% compared to 6.94% seven days earlier, while points used decreased to 0.76 from one in the prior survey period.
The 30-year fixed-contract 5/1 adjustable-rate mortgage recorded the only rise in the survey, jumping 11 basis points to an average of 6.76% from 6.65%. Points also increased to 0.82 from 0.72.
But as borrowers received some affordability relief thanks to the pullback in fixed rates over the past month, the share of ARMs shrank again to 8.3% of activity from 8.8%. Interest in ARMs typically rise and fall alongside fixed-rate movements. Four weeks ago, adjustable-rate mortgages approached 11% of volume.
When a home is up for sale, the seller will usually stage the home with furniture, appliances and other home decor items. This allows the buyer to envision what the home would look like when they finally move in. While this is helpful from both the seller’s and the buyer’s point of view, the buyer may buy the home thinking that the items come with it. To help you understand which items may not be included in the home purchase, we have compiled a list of six of them so you aren’t left wondering.
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Appliances
Although it may be customary for the seller to keep some of the appliances in the home after purchase, such as the refrigerator, stove, wine fridges, washers, and dryer, this is not always the case. If the appliances are not permanently affixed to the property, then they can be removed. These types of appliances can be considered the seller’s personal property so ensure that you know exactly what is being sold with the property before purchase.
Window Fixtures
Blinds and shades that are attached to the window can usually stay in the home but curtains and drapes that slide off are considered personal property and therefore do not need to stay in the home after they sell. It must be clear whether the window treatments are staying or going because they will need to be custom-fitted.
Above Ground Hot Tub and Swimming Pool
With an above-ground hot tub or swimming pool, they can easily be disconnected and considered personal property. Sometimes the seller may want to leave the hot tub or pool on the property when selling because it can increase the price of the home, but if the buyer does not want it, it should be removed by the seller. When purchasing the property, and you don’t want the hot tub or pool, you should include this in the purchase offer.
Furniture
The furniture in a home, which can include everything from mirrors to sinks, typically goes with the seller because it can be removed and is considered personal property. If you love the furniture that is in the property at sale, you can make an offer for the home which includes the furniture, but you would have to make that known in the purchase offer. Most things are negotiable when a house is being sold as long as it’s in the purchase offer and contract.
TV’s
It is a misconception that the TV’s in the property are staying when a buyer purchases a home. TV’s are technically considered personal property because they can be removed and are not permanently on the wall. This, along with everything else, needs to be mentioned in the purchase contract whether the TV’s are staying or going. Some sellers leave the brackets from the TV mount and take the TV, while others leave everything to up the price of the home.
Water Softener and Water Filtration Systems
Again, because these can be removed, the water softener and filtration system are not guaranteed to stay in the home unless specified in the purchase contract. It is important to know if these are staying or going because they can be quite costly if you have to buy one. Water softeners average around $1,500 while filtration systems can be around $500.
In any case, carefully reviewing the purchase contract, adding to it or asking more questions if anything is unclear is important to have a smooth transition into your new home!
If you’re preparing to enter the winter market, whether that’s through buying, selling, or both, it’s important to speak with a local realtor to learn about market conditions in your specific area. If you’re ready, give us a call today to speak with a qualified agent!
Gone are the days of the zero-down mortgage. At least for the typical home buyer.
Instead, the 2023 Profile of Home Buyers and Sellers from the National Association of Realtors (NAR) revealed that down payments haven’t been higher in decades.
This, despite the widespread availability of low-down and zero-down home loan options.
As for why, it could be because inventory remains low, which has kept competition lively in spite of much higher mortgage rates.
Another reason might be those high interest rates themselves, which make it less attractive to take out a large loan.
Median Down Payments Highest Since 1997 for First-Time Home Buyers
Per the NAR report, the typical down payment for a first-time home buyer was 8%, which might not sound like a lot.
But it is the highest figure since 1997, when it stood at 9%. If you look at the chart above, you’ll notice it dipped pretty close to zero in those bad years back in 2005-2006.
At that time, creative financing and lax underwriting (aka no underwriting at all) allowed home buyers to purchase a property with nothing down.
While that may have been risky on its own, they could also use stated income to qualify for the loan.
And they could choose a super toxic loan type, such as the now forgotten option ARM, or qualify via an interest-only payment.
That may explain why we experienced the worst mortgage crisis in recent history, followed by the nastiest housing market crash in generations.
So certainly some good news there, with down payments on the rise despite unaffordable conditions.
To that end, home buyers could be opting to put more down to get a more favorable mortgage rate, and/or to avoid mortgage insurance (PMI) and unnecessary pricing adjustments.
Back when mortgage rates were hovering around 3%, it made sense to put down as little as possible and enjoy the low fixed-rate financing for the next 30 years. Not so much today.
Another reason home buyers might be putting more money down is due to competition. While the housing market has certainly cooled this year, there is still a dearth of supply.
This means if and when something decent pops up on the market, there may still be multiple bids.
And those who are able to muster a larger down payment will generally be favored by the seller.
The one worrisome thing was how first-time buyers were securing their down payments recently.
They’ve had to increase “reliance on financial assets this year,” including the sale of stocks or bonds (11%), a 401k or pension (9%), an IRA (2%) or the sale of cryptocurrency (2%).
Always a bit questionable if selling retirement assets to purchase a home.
Typical Down Payment for Repeat Home Buyers Up to 19%
Meanwhile, the typical repeat buyer came in with a 19% down payment, which is the highest number since 2005 when it was 21%.
Down payments for repeat buyers also tanked prior to the early 2000s housing crisis because underwriting was so loose at the time.
There was really no reason to come in with a large down payment at the time given the wide availability of flexible loan products, and the notion that home prices would just keep on rising.
This explains why homeowners at the time also favored negative amortization and interest only home loans.
They all assumed (or were told) that the home would simply appreciate 10% in a year or two and they could refinance over and over again to better terms.
Today, it’s more in line with levels prior to that fast and loose era, and appears to be steadily climbing.
This could also have to do with a large number of all-cash home buyers, such as Boomers who are eschewing the 7% mortgage rates on offer.
But it is somewhat interesting that the median number was 19% and not higher.
After all, a 20% down payment on a home comes with the most perks, like lower mortgage rates and no private mortgage insurance requirement. But I digress.
Note that all the figures from the survey only apply to buyers of primary residences, and do not include investment properties or vacation homes.
How Much Do You Need to Put Down on a Home These Days?
As noted, low and no-down mortgages still exist, though they are typically reserved for select applicants, such as VA loans for veterans and USDA loans for rural home buyers.
However, you can still get a 3% down mortgage via Fannie Mae or Freddie Mac, which virtually every lender offers.
There are also FHA loans, which require a slightly higher 3.5% down payment, but lower credit score requirements.
On top of this, there are countless homebuyer assistance programs, including silent second mortgages that can cover the down payment and closing costs.
In other words, there is no shortage of affordable loan options today.
But there is an advantage to putting more down, such as eliminating the need for mortgage insurance and having a smaller outstanding loan balance.
With mortgage rates so high at the moment, the less you finance the better.
This could also make it easier to apply for a rate and term refinance if and when rates do fall, thanks to a lower LTV ratio.
Regardless, it’s good to see down payments rising as home prices become more expensive.
This contrasts the bubble years back in 2004-2006 when homeowners put less and less down as property values increased. It didn’t turn out well.