Buying a Home USDA vs FHA

by Amber S.
(MO)

Hello, I have a question regarding USDA vs. FHA home loans.

I am in the process of getting a home in the next month but was told I wouldn't be approved for a USDA program unless the home was under 100k and that if the home was over that amount I would have to go through FHA with a 3.5% down payment.

The down payment is difficult for me but in order to buy I have to come up with it.

Going into this I thought I would be eligible for a (no money down) program through USDA and I have gotten the run around so much from the mortgage broker that is working with me that something just doesn't feel right with what he is saying.

I make 31K a year and will be up to 34K at end of the year with my raise. My credit score is a 620. I was wondering if you could tell me if I am looking into this too much or does it sound odd to you? I have been researching it and the home I am buying is 115K and I have heard of streamline processing through USDA but am just not sure why I would have to go through FHA instead of USDA as I have never bought a home before.

I filed for bankruptcy back in 2011. But never owned a home and it was mainly because of medical bills. I have 35k in student loan debt as well right now and they are only including my income and not my husband's because his credit score is low and they said that with his score they couldn't add him to the loan so they are going off of just my income.

I am so confused and am only able to get the loan contingent upon my raise at end of August. Could you please give me some advice on this?

Thank you for your time!

Amber S.

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Buying a Home USDA vs FHA
by: Jeffrey

Hello Amber,

Thank you for stopping by my website and asking your questions.

You did a great job explaining the details of your situation so I can give you a good answer.

I know you said you are confused about the choice of using a USDA loan verses FHA. You indicate you feel that you're being given incorrect information.

The biggest issue you're facing from what I see, based on the facts you have given me is what's called a debt to income ratio.

Your second issue is credit score.

It does not matter if you use USDA or FHA both loan programs have debt to income ratio or DTI and credit score guidelines.

The way a DTI is figured is a simple math formula really. The ratio is 29/41. So this means 29% of your gross income goes to your housing expense ratio and 41% as your total obligations ratio.

Let me break it down using your numbers provided. To figure the HER (housing expense ratio) you take your gross yearly income and multiply it by 29%.

In your case, using the figures based on a raise you will soon be getting, 34,000 x .29 = 9860. Now divide that number by 12 and you get $821.66.

That is your total housing expense ratio per month. This figure has to include principal, interest, taxes and insurance (including PMI or MIP in the case of an FHA loan).

I've included a link to a house payment calculator to help you figure a payment. On this page it explains in greater detail how this formula works. You have to make a few assumptions for property taxes and home owners insurance but this should get you close.

Your second issue is credit score. The USDA loan has a minimum score of 640. You tell me your score is 620. So your credit score disqualifies you.

FHA loans with some lenders have a minimum score of 580 where as most could be 620.

So although you find yourself right on the edge or qualifying for a first time home buyer loan, you have two strikes against you, the first one is low income and the second one is credit score.

And yes, if your husband is working, his income could help you meet the DTI issue, but if his credit scores are low you cannot use his income for qualification purposes.

I hope this all makes sense to you. FHA does allow for down payment assistance in the form of a gift from family or even grants from the state.

Here's a link that may help you find Missouri first time home buyer grants.

Thanks again for visiting my site. I wish you the best in your house hunting pursuits.

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