Have you heard that the FHA loan is the best first-time homebuyer’s loan? In fact, it’s been known as only a first-time homebuyer’s loan for many years. That’s not the case, though. First-time homebuyers can use any type of financing that is available in today’s market. What you need to decide is which program is right for you.
DO YOU HAVE A DOWN PAYMENT?
The first question you should ask yourself is if you have a down payment. If you don’t, you can narrow your options down to the VA or USDA loan program. They are both government programs, but they require you to be of certain demographics in order to be eligible.
The VA loan is only for veterans of the military. If you served in the military and served at least 181 days during peacetime or 90 days during wartime, you may be eligible as long as you had an honorable discharge.
If you live in a rural area and your family’s income (total household) doesn’t exceed 115% of the average income for the area, you may qualify for a USDA loan. Again, you have to buy a rural home, but that is according to the USDA boundaries, which are slightly more flexible than you would think.
If you have some money to put down, you’ll have to figure out if you have at least 3.5% or 5%. The FHA loan requires at least a 3.5% down payment and conventional loans require at least 5% down on a home. Of course, both loans have other guidelines too, but this can give you a good place to start.
DO YOU HAVE GOOD CREDIT?
Now, how’s your credit? If it’s below 680, you can automatically start looking at the government loans including the FHA, VA, or USDA loans. They all have more flexible guidelines when it comes to credit scores.
If you do have a 680 credit score and you have at least 5% to put down on the home, the conventional loan could be the least expensive choice. If you don’t have the full 5% down payment, but you have some money saved, you may be able to accept gift funds for the remainder of the down payment – this varies by lender.
If you have a credit score below 680, you’ll need to determine if you qualify for the VA or USDA loan. The VA loan doesn’t have a minimum credit score and the USDA loan requires a credit score of 640. If neither of these loans work, you’ll need at least a 580 credit score with your 3.5% down payment for the FHA loan. Luckily, the FHA does allow you to get 100% of the down payment as gift funds.
HOW’S YOUR DEBT RATIO?
Another area that lenders pay close attention is your debt ratio. This is a comparison of your debts to your gross monthly income. Most loans and/or lenders won’t allow a DTI higher than 43% as that’s the standard for the industry.
Each loan program has its maximum debt ratio guidelines though:
- FHA loans – 31% housing ratio and 41% total debt ratio
- VA loans – 43% total debt ratio
- USDA loans – 29% housing ratio and 41% total debt ratio
- Conventional loans – 28% housing ratio and 36% total debt ratio
The housing ratio is the comparison of your total mortgage payment to your gross monthly income (income before taxes). The total debt ratio is the comparison of all of your debts including your mortgage payment to your gross monthly income. See where you fall to see which loan program will most likely work for you.
The bottom line is that you have to look at all qualifying factors to see which loan program might for you. If you have trouble with the down payment, you are better off with one of the government programs. If you have a good down payment, good credit, and a decent debt ratio though, the conventional loan may be your best bet. If you can’t get a conventional loan right away, don’t worry about it – you can always refinance into one in the near future.