As you’re dreaming about your Starter Home, don’t forget that you are likely to require a Starter Mortgage to pay for it. The mortgage programs offered throughout the Department of Housing and Urban Development’s Federal Housing Authority can be easy ways for borrowers with limited or lightly bruised credit to enter the home market with confidence.
Of course, like with any mortgage, FHA loans aren’t for everyone. However, they are really great for many men and women. Let’s get to know the loan the majority of people are talking about if they say they need an”FHA loan,” the FHA Basic Home Mortgage Loan 203(b).
Who Is This Loan For?
Before you waste your time by reading this entire site just to learn that you are not a good candidate for this loan, let’s get it all out upfront, shall we? FHA mortgages are great for a wide range of individuals, especially those with credit scores in the mid- to upper 600s with minimal down payments.
FHA is forgiving of some sins, such as unpaid medical bills, but is not as tolerant of monthly payments for things like revolving loans and guaranteed loans (know as the”debt-to-income ratio”).
Where Fannie Mae’s conventional loans may let you have upward of about 45 percent of your income moving on monthly debts and housing, FHA mortgages are a lot more selective. Your housing debt can’t exceed 31 percent as of the writing of this blog; your overall debt has to be below 43 percent at this instant.
Looking at that in a more tangible way, it breaks down like this if you make $50,000 annually:
— Your monthly income: $4,166.67
— FHA home debt allowed: $1,291.67
— FHA total debt allowed (includes housing): $1,791.67
— Conventional debt allowance: $1,875
It might not look like a large difference overall, however, the FHA restricts your mortgage to about a third of your income, even though in some markets that’s a difficult, if not impossible, house to find. Your conventional loan doesn’t discriminate, so if you have zero credit card debt, then you may be able to purchase more house.
But that’s not to say that the FHA loan is a bad mortgage. It’s a really decent one, it just has a great deal of rules designed to ensure you succeed at homeownership.
The FHA Downpayment Conundrum
FHA mortgages maintain one of the lowest downpayment needs of any mainstream mortgage offering. At just 3.5 percent, this financing type makes it easy to get into a home. That $200,000 house you’ve got your eye on? You just need $7k for a downpayment (closing costs are separate)! That’s $3k less than the conventional loan can offer.
However, there’s a pretty major catch with that low downpayment. The mortgage insurance that makes it possible for you to put down such a small amount of money is likely to stay with you for the life of the loan. That’s the case, in fact, unless you have scraped together at least 10 percent of the sales price for a downpayment.
Theoretically, you could refinance your reduced downpayment FHA loan once you have paid down about 20 percent of the total value to shake the mortgage insurance, however there are no guarantees that you’ll end up in a better place. Rising interest rates, additional costs to close a new loan and even a new appraisal can eat into these cost-savings.
Some lenders offer a streamline refinance, which can save a bundle when you are ready to refinance the notice you already have. Check with yours to see if the mortgage you are signing will qualify. You have some options, let’s make sure you’re taking advantage of them.
Oh, That Thing About Student Loans…
FHA is picky about your debt, that may have been mentioned. One matter that it is almost cruelly stringent on is student loan debt. Unlike Fannie Mae, that only figures your actual payment into your debt-to-income ratio, FHA employs a formula that often ends up in a rejection for otherwise really well-qualified borrowers.
As of the writing of this article, FHA figures your monthly payment as one percent of your debt. Say, for example, you have $68,000 in student loan because you triple majored in everything, but you happen to be working in a field that won’t encourage a payment anywhere near what that debt needs to be repaid.
Your federal student loan is registered in an Income Based Repayment program, using a payment of below $20 a month.
A conventional loan would verify that $20 and that will be all that will enter your DTI from the student loans. FHA, on the other hand, would add $680 to their calculation. Which, considering you are in an IBR, will almost certainly make it impossible for you to qualify for anything.
TL;DR: FHA Ups and Downs
FHA has some fine features:
— Great for Individuals with lower credit scores or small credit blemishes
— Allows for a smaller downpayment vs. other mortgages
— As a federally regulated loan, closing prices are often reduced
But it also retains many buyers back with:
— Low DTI allowances
— High student loan payment calculations
— Lifetime mortgage insurance
If your overall debt is low, you don’t have a student loan to deal with (or you have a very small one) and you’re planning on selling in five or five years, FHA loans can absolutely get you into the real estate market faster with less money out of pocket.
The extra time spent placing monthly payments toward equity rather than rent can help you become more financially secure earlier.