If you are considering purchasing a home, there are numerous financing options on the market. One of these is Federal Housing Administration or FHA loans. Because they are government-backed, they are more flexible than other forms of lending. They can be extremely attractive if you do not qualify for a conventional mortgage. But what are the differences, and what impacts your loan? Read on for more information.
Your Credit Score
It is easy to mess up your credit score and hard to rebuild it. Unfortunately, a lower credit score is one of the biggest hurdles when buying a home. Many lenders will only consider financing you if your credit score is 620 or higher.
You can qualify for an FHA loan with a credit score as low as 500. A credit score from 500-579 will require 10% down, but if your score is 580 or higher, you may qualify for a down payment as low as 3.5%.
Your Debt-to-income Ratio
One of the first calculations a mortgage lender will do when considering your mortgage is your debt-to-income ratio. To make this calculation, they add up your monthly expenses, including:
- Car payments
- Other monthly loan payments
- Credit card payments
- Alimony or child support payment
Groceries, gas, and utility payments are not a part of the calculations.
They will then divide this number by your gross monthly income. The resulting number, which the lender reports as a percentage, is your debt-to-income ratio.
Many lenders prefer your debt-to-income ratio to be less than 43% to qualify for a mortgage. An FHA mortgage lender will consider debt-to-income ratios up to 50%. While these are only a few percentage points, they can make a huge difference, especially if your current housing costs are high.
Type Of Property
You may only use an FHA loan for your primary home where you are planning to reside. You cannot use an FHA loan for second homes, rentals, or investment properties.
At least one borrower who has signed the mortgage must plan to reside in the home full-time for the house to be considered owner-occupied. You must also move into the home within 60 days of closing and live there for at least one year.
You can use FHA home loan programs to purchase single-family dwellings, manufactured homes, multi-family homes, and condominiums. Any property must meet the minimum FHA requirements and undergo an appraisal and home inspection.
If you purchase a home that requires significant repairs, you may qualify for a 203(k) renovation loan. This loan allows you to make these repairs within specific timeframes and has different occupancy rules during the repair time.