By Yvonne Marsh, CFP®, CPA

While a 20% down payment is the holy grail for home purchases, don’t let it be a roadblock to moving out of a rental and into a home.  You’ve got options to help you get started!

FHA Loans are widely available, government backed loan programs where the Federal Housing Administration is stepping in and guaranteeing your loan to the lender, in case you ever default. Most banks and mortgage companies offer FHA mortgage loans. They are especially helpful if you don’t have a big down payment saved and/or your credit score isn’t stellar.

The great news is that FHA loans require as little as 3.5% down payment with a credit score of at least 580 and are especially popular with first-time home buyers.  You do need to have a steady job with proof of employment and a debt-to-income ratio of less than 43%. 

To find your debt-to-income ratio, up all of your monthly required debt payments – plus your new monthly mortgage payment - and then divide by your gross monthly pay.  If it’s less than 0.43, you’re good to go. If it’s more than 0.43, then you need to pay down some other debts first.

If your credit score isn’t great, but you can come up with 10% down, you can still qualify with a 500 credit score.  FHA allows you to use cash gifts toward the down payment (if you have some rich relatives 😊) , as long as it’s documented that it’s truly a gift and not a loan.

FHA loans also allow you to roll most of your closing costs up into your mortgage, limiting the amount of cash you need to have to get started, which is a huge plus for home buyers trying to get started.

In exchange for the government’s willingness to back you up on this lower-down-payment home purchase, you have to pay for something called private mortgage insurance (PMI).  It’s not the end of the world – you just need to factor it in.  (And if it gets you out of renting and into your first home years ahead of saving up a 20% down payment, I say it’s worth it.)  PMI is charged in 2 pieces:  an upfront charge plus an ongoing monthly charge. 

The upfront piece is typically 1.75% of your loan amount, which can be financed and included in your mortgage balance.  The ongoing charge depends on factors such as the size and length of your mortgage, and the amount of your down payment.  Annual PMI percentages typically range between 0.15% and 0.7% of your initial loan, and 1/12 of that amount is added to your monthly payment.  In some cases, you can have the PMI removed once your loan is paid down to less than 80% of your home’s market value. 

Lastly, FHA loans are only available for your primary residence, so no rentals or investment properties are allowed.  And you need to move in within 60 days of closing – though that should be an easy requirement to meet.  So if you’re renting or if you’re in a starter home and itching to move up, what are you waiting for?  Check your credit score at www.annualcreditreport.com, a reputable source authorized by federal law, and get going!