Are FHA Loans Just for First-Time Home Buyers?

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Reader question: "I have been researching the FHA loan program because we are planning to use it when purchasing a house. But I can't seem to find a straight answer to a particular question. Are FHA loans just for first-time home buyers? I ask this because we have owned a house in the past."

By all means, let's start with a straight answer. No, the FHA program is not limited to first-time buyers. Anyone who meets the eligibility requirements issued by the Department of Housing and Urban Development (HUD) can use this financing program. That includes borrowers who have owned homes in the past.

FHA loans are commonly associated with first-time home buyers, and in some cases they are well suited for this particular audience. That's because of the relatively low down payment.

According to current HUD guidelines, borrowers who use this program to fund a home purchase can make a down payment as low as 3.5% of the appraised value or purchase price. Most conventional (non-government-backed) home loans require down payments of 5% or above.

A homeowner who sells a house at a profit could use those proceeds to cover a 10% or 20% down payment on the next house. But this is obviously not the case for a first-time home buyer. Many first-time buyers lack the funds to make a larger down payment. This is what attracts many people to the FHA program in the first place.

FHA Is Not Just for First-Time Home Buyers

This is actually one of the most common misconceptions about the FHA mortgage insurance program. So let me restate it. FHA loans are not just for first-time home buyers.

There are certain limitations and restrictions for this program, such as the 3.5% down payment requirement mentioned above. There are also certain credit score and debt-to-income requirements. But there is no rule that says you have to be a first-time buyer. If you meet the basic eligibility criteria, you could qualify for an FHA loan -- even if you have owned homes in the past.

Elsewhere on this website, you can find an overview of those minimum eligibility requirements and qualification guidelines. You might also want to download our FHA handbook, because it covers those guidelines in more detail (visit FHAhandbook.com).

Is it the Right Program for You?

So that answers the first question. No, FHA is not just for first-time buyers. Previous homeowners are fully eligible for the program, as long as they meet all other guidelines and requirements (credit scores, down payments, etc.).

The next logical question is, is FHA right for you? If you have limited funds for a down payment, you might want to consider using this mortgage program. It offers a path to homeownership with less money out of pocket, which appeals to cash-strapped home buyers.

Only the VA and USDA loan programs have a lower down-payment requirement. In fact, those programs offer 100% financing to qualified borrowers. But they are limited to specific audiences -- military service members and low-income rural homeowners, respectively.

Additionally, there are some credit unions that offer 100% financing to their members.

The bottom line: If you don't qualify for VA or USDA financing, and you're not a member of a credit union that offers 100% financing, an FHA loan is probably your best bet for a low down payment.

More Than 50% of These Loans Go to First-Time Buyers

According to National Mortgage News, the Federal Housing Administration "depends on first time buyers for over 50% of its business. In January, FHA endorsed 45,800 single-family loans, including 26,500 loans for first-timers."

This is mainly a byproduct of the enticing down-payment option mentioned earlier. It is not the result of any requirement that says borrowers cannot have purchased a home before. As stated above, this program is open to anyone who meets the basic eligibility requirements set forth by HUD.

The minimal out-of-pocket expense attracts many first-time home buyers to the program. More than half of these loans go to people who have never purchased or owned a house in the past.

There are other perceived (and sometimes dubious) benefits as well, such as an easier approval process. But the 3.5% investment is by far the most powerful lure for borrowers -- particularly those with limited funds.

FHA survey results

In a survey conducted by the Home Buying Institute, 54% of respondents said the low down payment was their primary reason for wanting to use the FHA program. See corresponding chart above.

Where to Learn More

This article answers the question: Is FHA just for first-time home buyers? This website offers an ever-growing library of articles and tutorials on this subject. If you would like to learn more about the federal government's mortgage insurance program, use the "FHA Library" menu in the upper-right sidebar area.

You can also download our 65-page handbook from FHAhandbook.com. It was written specifically for home buyers and mortgage shoppers, as opposed to lenders. It offers a concise, consumer-friendly overview of the FHA loan program. You can download the guide in PDF format at no cost.