IF YOU’RE LOOKING TO BECOME A FIRST-TIME HOMEOWNER the process can seem overwhelming. Don’t expect it to happen overnight, as you want to make sure you have explored all the best options for your situation—but planning in advance will help you attain your dream home with fewer bumps along the way.
The first thing you’ll want to do is check your credit report, but next you’ll want to start looking at home loan lending options. One option you might not have considered is a Federal Housing Administration (FHA) loan. These loans are extremely popular for first-time buyers, as they have a much lower down payment and a very low credit score requirement.
FHA Loan Requirements
1. You must have a credit score of at least 580. A conventional loan requires a minimum of 680.
2. Your debt to income ratio must be less than 43% (i.e., the percentage of your income that you spend on debt including credit cards, student loans, mortgage, car loans, etc.). A conventional loan needs to be closer to 36%.
3. A down payment of 3.5% is required, although if your FICO score is between 500 and 579 this may be increased to 10%. Conventional loans require 20% of the house purchase price down. If you have less than 20% you can still get the loan, but you will be required to purchase private mortgage insurance and pay it until you have reached at least 20% equity in the home, which can take years.
4. It must be your place of residence, and you need to occupy the property within 60 days of closing. A conventional loan can be used for an investment property which can be rented out. However, with an FHA loan you can purchase a duplex, triplex, or fourplex and so long as you live on the premises you can rent out the other units.
5. You must have proof of income and a steady job.
Keep in mind that an FHA loan does have limits. There is a maximum amount of loan that the FHA will give you; for example, in 2019 in low cost areas (which the FHA defines as one where you multiply the median home price by 115% and the product is less than $356,362) the FHA loan amount maxes out at $314,827 for a single family home. These amounts are updated annually and vary depending upon the state.
Another requirement for FHA loans is that you must purchase Private Mortgage Insurance (PMI). It will require an up front fee of 1.75% of your home’s purchase price, no matter what your down payment is. The annual mortgage insurance premium ranges from 0.45% to 1.05% of your mortgage amount, depending on the term and down payment.
While both conventional and FHA loans have their own pros and cons, it's important to examine them fully to determine what type of loan works best for you and your circumstances as you make the biggest purchase of your life. As always, I am available for any questions and advice you may require. Don't hesitate to call today!
Additional Resources :
Home Buyer’s kit by U.S. Department of Housing and Urban Development
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Buying a Home | HUD.gov / U.S. Department of Housing and Urban Development (HUD)
Home Buyer’s kit