A reader asks, “I’m not a first time home buyer, I have a conventional loan for a home that I’m planning to keep as a rental home. Can I qualify for a purchase FHA loan on a primary home?”
One of the common misconceptions about FHA home loans is that you MUST be a first-time home buyer in order to qualify for one. This is not true. You may have state or local homebuyer assistance programs in your area that do require the applicant for that program to be a first time buyer, but FHA loans are open to all qualified applicants.
The real issue in this reader question has more to do with debt-to-income ratios (DTIs)–will the FHA lender approve a buyer who already owns a home?
Single-family new purchase FHA home loans are for primary residences. The borrower MUST use the property bought with an FHA guaranteed mortgage as the main address. This particular reader question addresses that issue, so there isn’t a problem on that front. But the FHA does look carefully at a borrower’s debt-to-income ratio. If the existing mortgage PLUS the new mortgage on a potential FHA mortgage exceeds the FHA DTI the loan may be denied unless there are compensating factors.
How does the FHA view DTI? According to an FHA FAQ (Question 77 on the page titled “100 Questions and Answers About Buying a New Home”, we learn the following:
“77. WHAT IS THE DEBT-TO-INCOME RATIO FOR FHA LOANS?
The FHA allows you to use 29% of your income towards housing costs and 41% towards housing expenses and other long-term debt. With a conventional loan, this qualifying ratio allows only 28% toward housing and 36% towards housing and other debt.”
Again, these standards MAY be flexible IF the borrower has compensating factors including addition income, substantial cash reserves or other collateral. Borrowers should discuss their individual circumstances carefully with a lender before deciding what to do about a new FHA mortgage if they are concerned that their current DTI may be too high. Don’t assume you cannot apply for an FHA mortgage–talk it over with a lender to learn what your options may be.
Do you have questions about FHA mortgages? Ask us in the comments section.