How To Get A 0 Down FHA Loan To Purchase Your First Home

As a first-time homebuyer with limited savings, being able to purchase a home with no money down sounds like a dream come true. Thanks to 0 down FHA loans offered by the Federal Housing Administration, this dream can become a reality for qualified borrowers.

I should know – I purchased my first home last year with an FHA loan and didn’t have to put a single dollar down at closing. In this article, I’ll explain what 0 down FHA loans are, their pros and cons, eligibility requirements, and tips for securing financing.

While certainly not the easiest loan to qualify for, FHA 0 down loans provide an incredible opportunity for buyers with little cash for a down payment to achieve homeownership sooner I hope my experience getting approved helps you successfully navigate the process too!

What Is A 0 Down FHA Loan?

FHA loans are government-backed mortgages that allow for lower down payments and flexibility with credit requirements compared to conventional loans Borrowers only need a credit score of at least 580 and debt-to-income ratio below 50% to qualify

But the best part is that these FHA loans allow for 0% down financing. No cash is needed for the down payment or closing costs on an FHA loan. Instead, these costs can be wrapped into the total loan amount.

Over 1 million FHA loans are issued annually, with about 85% going to first-time home buyers So you’re not alone in needing limited down payment financing options!

0 down FHA loans provide an awesome opportunity for buyers with:

• Very little money saved for a down payment
• Limited disposable income to save for a down payment
• Credit challenges that may prevent conventional loan approval

While certainly not easy to qualify for, 0 down FHA loans offer a way forward to homeownership.

What Are The Benefits Of A 0 Down FHA Loan?

A 0 down FHA loan provides home buyers with these great benefits:

Purchase With No Cash Down

The #1 benefit is being able to buy a house with literally 0 down. This removes the huge hurdle of saving up tens of thousands of dollars for a conventional 20% down payment.

Low Credit Score Requirements

FHA loans only require a minimum credit score of 580. Many buyers turned down for conventional mortgages qualify for an FHA loan.

Low Monthly Mortgage Insurance

FHA loans require mortgage insurance, but rates are capped at 0.85% of the total loan amount. On a $300,000 loan that’s just $255 extra monthly.

Fixed Interest Rates

FHA loans come with predictable fixed rates. Your monthly mortgage payments will never change, making it easy to budget.

Low Closing Costs

Closing costs can also be wrapped into the total loan amount, requiring $0 cash out of pocket at closing.

For buyers with limited savings but stable jobs, FHA 0 down financing breaks down the barriers to homeownership. You can purchase and start building home equity years sooner.

What Are The Drawbacks Of A 0 Down FHA Loan?

While 0 down FHA loans provide that opportunity to purchase a home without savings for a down payment, there are some drawbacks to note:

• Mortgage Insurance (MI) Required: FHA loans require mortgage insurance, adding to the monthly cost. Conventional loans allow MI cancellation once 20% equity is reached. But FHA MI continues for the full loan term.

• Limits On Loan Amounts: FHA loan limits vary by metro area but max out at around $650,000. In more expensive markets, you may not be able to purchase a suitable home within these limits.

• Upfront Mortgage Insurance Premium: In addition to monthly MI, FHA loans require an upfront MI premium of 1.75% of the loan amount. This can be rolled into the loan but adds to the total interest cost.

• Lower Loan-To-Value (LTV) Ratio: Cash-out refinancing is limited to a maximum of 80% LTV on FHA loans. So you won’t be able to tap all your home’s equity later.

• More Stringent Qualifications: 0 down FHA loans come with stricter debt-to-income, employment, and credit history requirements compared to conventional loans with 5% or 10% down.

As long as you understand the trade-offs, a 0 down FHA loan can be an incredible opportunity for first-time buyers. But conventional financing should be explored first if you have at least 5% to 10% saved up.

FHA Loan Eligibility Requirements

While FHA provides nice flexibility on down payments and credit, borrowers must meet these eligibility standards:

Credit Score: Minimum 580 credit score. Many lenders impose stricter requirements from 620 up. The higher your score, the better your chances.

Debt-to-Income (DTI) Ratio: Total debt obligations cannot exceed 50% of gross monthly income. The lower your DTI, the better.

Employment History: Stable 2-year employment history in the same line of work. Gaps must be explained. Self-employment may require 3+ years of income proof.

Homebuyer Education: At least 8 hours of homebuyer education is required if you have not owned a home in the past 3 years.

Residency Status: You must be a U.S. citizen or lawful permanent resident with a valid SSN and 2-year housing history.

Providing lots of documentation supporting your ability to afford monthly payments gives you the best shot at approval. My lender went through 2 years of tax returns, bank/asset statements, and employment verification.

7 Tips For Getting Approved For A 0 Down FHA Loan

After going through the process myself, I wanted to share some tips that I think helped me successfully get approved for my 0 down FHA loan:

1. Check your credit report and score. Ensure there are no errors dragging down your score. Dispute and fix any issues immediately. A higher score improves your chances.

2. Lower credit utilization. Getting balances on revolving accounts below 30% of their limits can boost your score. Pay down cards or consider balance transfers.

3. Avoid new credit applications. New hard inquiries when lenders check your score can impact approval odds. Only apply for what’s absolutely necessary.

4. Explain past issues. If you’ve had late payments, defaults, or other issues, draft an explanation letter for underwriters explaining the circumstances that caused them and how you’ve improved since.

5. Document down payment sources. You’ll need to show where the upfront mortgage insurance premium and any closing costs are coming from via gift letters from family, grants, etc if not rolling into loan.

6. Build up savings. While 0 down is allowed, having 3-6 months of mortgage payments saved provides a cushion and shows financial responsibility.

7. Connect with a broker. Brokers have relationships with multiple lenders and can help assess which ones may offer you the best terms given your scenario.

The 0 down aspect of FHA loans is the headliner. But you still must demonstrate to lenders you can consistently make payments. Preparing your finances and clearly communicating your homeownership readiness is key.