FHA Zero Down Loans: The Complete Guide for First Time Homebuyers in 2023

Buying your first home is an exciting milestone. But saving up for a down payment can feel impossible when you’re just starting out. That’s where FHA zero down loans come in.

With an FHA zero down loan, you can get into your dream home without any money down. Keep reading to learn everything you need to know to get approved and buy a house with zero down using an FHA mortgage.

What is an FHA Zero Down Loan?

An FHA zero down loan, also called an FHA 203(b) loan, allows you to buy a primary residence without making a down payment It is insured by the Federal Housing Administration (FHA), which is part of the US. Department of Housing and Urban Development (HUD).

Here are some key features

• No down payment required – The big benefit is not having to save up cash for a down payment.

• Low credit score requirements – You can qualify with a credit score as low as 500 using non-traditional credit. The minimum is usually 580.

• Low monthly mortgage insurance – FHA loans require mortgage insurance no matter your down payment amount But FHA MI rates are low

• Fixed interest rate – FHA loans come with a fixed rate. So your monthly payments will remain steady for the life of the loan.

• 30-year loan term – FHA zero down loans come with a 30-year term. This results in lower monthly payments than shorter terms.

• Less strict debt-to-income ratio – FHA allows a DTI up to 55%, which is higher than conventional loans. This helps buyers who carry some debt.

• Wide home availability – You can use FHA zero down financing to buy almost any single-family residence, townhouse or condo. VA and USDA loans have more location restrictions.

As you can see, FHA zero down loans offer several perks for first-time buyers and those with limited savings. Keep reading to learn more about requirements and the step-by-step process.

FHA Zero Down Loan Requirements

While FHA zero down loans are accessible for many buyers, you still have to meet certain requirements. Here are the key eligibility criteria:

• Minimum credit score of 500 – As mentioned above, you can qualify for FHA financing with bad credit and scores starting at 500 using non-traditional credit guidelines. The minimum is 580 with traditional credit.

• Debt-to-income ratio below 55% – Your total monthly debt payments, including the new mortgage, should not exceed 55% of your gross monthly income.

• Stable income – You’ll need at least two years of stable income history. FHA defines “stable” as no gaps in employment greater than 30 days over the last two years.

• Homebuying education – All FHA buyers must complete a short online homebuyer education course. Many are free.

• Owner-occupancy – FHA zero down loans are only for primary residences. You cannot use this financing to buy a vacation home or investment property.

• Single-unit home – The property must be a single-family house, condo or townhouse. No multi-unit properties allowed.

As long as you meet these requirements, you can buy a home with zero down using an FHA loan. Now let’s walk through the step-by-step process.

How to Get an FHA Zero Down Loan

Follow these six steps to buy a house with zero down using an FHA mortgage:

Step 1. Check your credit

Before applying, check your credit scores and reports. This gives you time to correct any errors and improve your score before submitting your official application. Lenders will check your credit when you apply.

Step 2. Get pre-approved

FHA pre-approval involves submitting financial details to verify you meet the above requirements. Get pre-approved before making an offer, so you can shop with confidence and make competitive offers quickly.

Step 3. Make an offer

Once pre-approved, you can start shopping for homes. When you’re ready to make an offer, inform the seller you are using FHA financing. Your real estate agent can help you submit a strong offer.

Step 4. Complete the loan application

After your offer is accepted, your lender will have you fill out a full loan application with income, employment, asset and debt details. You’ll also need to pay for the appraisal upfront.

Step 5. Get home appraised

The property must be appraised to verify it is worth at least what you are paying. FHA loans have minimum property standards regarding safety and livability that your home must meet.

Step 6. Close on time

Finally, submit any remaining documentation your lender requests. Then show up on time for your closing to get the keys to your new home!

And remember, you can do all of this with zero down using an FHA loan.

Where to Get an FHA Zero Down Loan

Many different lenders offer FHA zero down loans. Here are some places to consider shopping for the best rates and fees:

• Online lenders – Companies like Quicken Loans and LoanDepot offer online rate quotes. This makes it easy to compare FHA loan options.

• Credit unions – Local credit unions are a go-to source for first-time buyer programs. And they offer personalized service.

• Mortgage brokers – Brokers have access to multiple lenders and help you find the most competitive FHA zero down loan.

• Banks and mortgage lenders – Shop national lenders like Wells Fargo and Chase as well as smaller local mortgage companies.

• Real estate agents – Ask your buyer’s agent for recommendations on FHA zero down lenders they prefer to work with.

No matter where you apply, shop with multiple lenders to make sure you get the best rate deal. Each lender will have slightly different rates and fees.

FHA Zero Down Loan Rates & Costs

While FHA zero down loans make buying a home affordable, it’s still important to consider long-term costs. Here are the rates and fees to expect with an FHA zero down mortgage:

Interest rates – FHA zero down loans will have a fixed interest rate. As of this writing, rates are hovering around 7% APR for a 30-year loan. Your actual rate will depend on your finances and credit.

Upfront mortgage insurance – FHA loans require 1.75% of the loan amount in upfront mortgage insurance. On a $200,000 loan that’s around $3,500. This can be rolled into the total loan amount.

Monthly mortgage insurance – You’ll also pay an annual 0.45% to 1.05% of the loan amount. With excellent credit on a $200,000 loan, it’s about $75 per month.

Closing costs – Expect to pay around 3% to 5% of the loan amount in closing costs and fees. You can work with the seller to pay some closing costs.

Ongoing costs – Finally, factor in taxes, homeowners insurance, utilities, maintenance and association fees if applicable.

While rates and fees add up, they should fit comfortably within your monthly budget thanks to the long loan term and low monthly payments. Now let’s look at some pros and cons of FHA zero down loans.

Pros and Cons of FHA Zero Down Loans

FHA zero down loans make buying a home with no money down possible. But are they the right choice for you? Here are some key advantages and disadvantages:

Pros

• Zero down payment required
• Low monthly mortgage insurance
• Minimum credit score of 500
• Low fixed interest rates
• 30-year loan term
• Finance closing costs

Cons

• Upfront and monthly MI costs
• Mortgage rates slightly higher than conventional loans
• Strict debt-to-income ratio limit
• Limited mostly to primary residences
• Home must meet minimum property standards

As you weigh the pros and cons, think about your savings, monthly income, credit score, and plans for the home. An FHA zero down loan gives borrowers with low savings and credit challenges a path to homeownership. But make sure it aligns with your goals.

Alternatives to FHA Zero Down Loans

FHA mortgages are not the only option for buying a home with zero down. Here are a few alternatives if you don’t qualify for an FHA loan:

• VA loans – For veterans and service members, VA loans offer 0% down and expanded eligibility.

• USDA loans – Very low-income buyers in rural areas can buy with 0% down using USDA financing.

• Down payment assistance – State and local programs provide grants and loans to cover down payments and closing costs.

• Seller concessions – Some sellers are willing to cover the buyer’s closing costs as part of the transaction.

• **Gift