Buying a home, especially for the first time, can be scary and exciting. There are so many things to think about and costs to cover. And, if you are like most potential homeowners, you will need a little bit of help financing everything.

This is where loan products come in. They fill the gap between the money that you have now and the money you are guaranteed to bring home each month in the future.

With a conventional mortgage, you put down a down payment of roughly 20% of a home’s total purchase price. Then, you borrow the other 80% from the bank and pay it back month by month. The financial institution then uses your credit score to determine the interest rate you pay for borrowing the money in first place. The higher your credit score, the lower the interest rate on your home loan.

However, sometimes these traditional terms just won’t cut it. This is why some lenders offer alternative loan programs called FHA loans.

What are FHA loans?

An FHA loan is a mortgage issued by an FHA-approved lender in partnership with and insured by the Federal Housing Administration (FHA). These loans are for low-to-moderate income borrowers. This is because FHA loans require lower minimum down payments and credit scores than many conventional loans do.

The Federal Government created the Federal Housing Administration in 1934. The nation was right in the middle of the Great Depression. As you can imagine, the real estate market was in a lot of trouble during this time. Default rates on loans and foreclosures on homes were at an all-time high. Only 40% of the country owned their homes and even those that did were still struggling.

The FHA loan program gave relief to those struggling and has made owning a home a tangible reality for millions of Americans since its inception.

Here is a table to help you understand how the loans differ from conventional loans:

FHA Loan Conventional Loan
Minimum credit score of 500 Minimum credit score of 620
Down payment of 3.5% with a credit score of 580+ and 10% for a credit score of 500 to 579 Down payment of 10% to 20%
15 or 30-year loan length 10 to 50-year loan length
Mortgage insurance is required upfront and annually. Upfront: 1.75% of the loan and annual: 0.45% to 1.05% of the loan No mortgage insurance required with down payment of 20%. If required, only 0.5% to 1% of the loan amount per year
Offers down payment assistance programs Does not offer down payment assistance programs

Lenders for both of these loan types should offer great customer service and have similar closing costs.

How to Find Good FHA Lenders

Finding the best FHA lenders doesn’t have to be as difficult as you might think it is. We’re here to give you the best tips and tricks for securing the best loan from the most reputable lender. Typically, people might struggle because they start too big and try to work down.

This means that they find a lender that they like and then hope that company fits their personal needs for a loan. This is a big misstep when selecting a mortgage, but even more so when you need to find a lender for an FHA loan, because not all lenders offer them.

To minimize the amount of stress and disappointment you might feel as a home buyer throughout the entire process, what you should do instead is take stock of exactly what you need from a mortgage lender and work your way out from there. This way, if a particular company doesn’t tick all of your boxes, you will be able to tell quite early on and therefore waste way less of your time.

Here are the steps to follow before you start looking for a good FHA lender:

1. Assess your credit score.

The first thing you need to do is make sure that your credit score is at least 500. You can do a number of things to improve it quickly if it is not. The first would be to begin at least making the monthly minimum payments on outstanding credit cards or student loan debt, perhaps by using Dave Ramsey’s Debt Snowball plan. You can read more about that here.

If you can get the number on your credit report up to at least 580 before you apply for your loan, then you can qualify for an FHA loan with a down payment of as little as 3.5% of the home’s total purchase price.

However, do keep in mind that these are the FHA credit score minimums. Individual lenders might require a higher score, like 600. This is why it’s important to know your personal information before going to look for a lender. This way, if a lender requires a score you simply don’t have, you can walk away from the deal before you waste too much time.

2. Know your fees.

Most loans that the FHA sponsors have to have mortgage insurance. This is because if you default on the loan, the insurance can swoop in and take care of it so the lender isn’t out the money. Keep in mind, however, that these mortgage insurance premiums are uniform. Lender one will charge the same amount as lender two.

One thing that can change from lender to lender is the lender fees. But the nice thing about this is that when you apply for a mortgage, the government requires that the lender gives you an official loan estimate within three business days of applying. So, you can essentially just line up all of your offers and have a look at all of the terms.

To find the lender’s fees, look on the second page of the loan estimate. You’ll usually see a section with the title “closing cost details.” Here, under Section A known as “origination charges” you’ll see what the lender plans to charge you in fees.

3. Shop around.

Once you have your credit score and the location of the fees on the document in your back pocket, be sure to look around at local lending agencies. Because FHA mortgage rates can be pretty unpredictable, if you want to save money it’s important to have a good idea of what’s out there. This is because, just like when you buy fuel, two stations in the exact same city (sometimes very close to each other!) can have very different rates.

4. Consider the APR.

As you examine various mortgages, it’s also worth it to consider the APR attached to each one. APR stands for annual percentage rates. Your lender bases your monthly payment on a particular interest rate. This rate is on the front page of the loan estimate document.

You can find it under “loan terms.” Next, you can find your annual percentage rate (which is the base interest rate of the loan + all of the fees) on the last page under “comparisons.”

If you have ever wondered how it is that lenders can make so much profit, you’ve found it! They build it into your mortgage through fees (like origination or application fees) or by working their profit into your interest rate. So, by looking at your APR, even on an FHA loan, you’ll be able to tell the rate that you need to pay, versus the rate they are making you pay.

5. Pick the right FHA lender for you.

Like we mentioned before, selecting an FHA loan lender that matches your needs exactly is a pretty big deal. This is because if you need to purchase a home with an FHA loan, it’s likely already a huge financial expense that might be causing you some amount of stress. You don’t want to add to that by choosing the wrong lender!

The Best FHA Lenders

So, we’ve told you how to select the best FHA lender for you, but how do you locate lenders to choose from in the first place? This is we put together a special list of all different kind of lenders, so you at least know where to start on your journey.

The Best FHA Lenders for First-Time Home Buyers

CitiMortgage and Flagstar Bank

These two lenders have a lot of patience for first time homebuyers. They have solid FHA programs with flexible interest rates and down payment options, as well as friendly and knowledgeable staff.

The Best FHA Lenders for an Online FHA Mortgage Experience

Rocket Mortgage and PennyMac

These two online lenders have such amazing and functional websites that you won’t need to see them in person or talk to your lender face to face. You can do everything online no problem, making taking full advantage of this non-traditional mortgage almost too easy.

The Best FHA Lenders for Nontraditional Credit Histories

New American Funding and PNC Mortgage

If your credit is a little bit all over the place, if you’ve had to build it back up multiple times, or you even have a bankruptcy in your past, these lenders are ready and willing to hear you out and work with you.