1. Downpayment
Conventional loan: 5% to 20% down, depending on your credit score and how much your bank likes you. I am actually aware of a conventional loan with only $500 down, it is a 100% loan!
FHA loan: 3.5% down
2. Debt to income ratios
Conventional: 28/36
FHA: 29/41
The first number (28 or the 29) is the supposedly maximum ratio in % (percents) of the house payment (including mortgage payment, tax, insurance, and Homeowner's Assoc. Fee if applicable) to your gross monthly income. The second number (35 or 41), is the max ratio in % of the house payment plus all your recurring monthly debt to your monthly income. If you have no debt, you can just use the second number. For example, if your monthly income is $1200 you can get a mortgage with a
1200 x 36% = $432 monthly payment under conventional,
and 1200 x 41% = $492 monthly payment under FHA guidelines.
Those ratios are by no means written in stone. If you have decent credit, a bank will go over those ratios, raising the second number up to 43 - 45%. And with an excellent credit the bank may even go over 50%.
Example 1:
A huge condo is listed for $40,000, tax $1700, HOA fees $320
Your loan amount would be: 40,000 - downpayment
Your monthly income is $1300 a month
When you add the HOA fee and the taxes you come up with 462/month
Your debt to income ratio (provided you have no credit card bills or car payments) allows you a $468/month with a conventional loan and a $533/month payment with an FHA loan. Since your homeowners fees and taxes are already up to the allowable ratio, that eliminates the conventional loan for you. (At least the conforming kind with a decent interest rate. There are lenders that do non-conforming loans.)
Supposing you go FHA and put 5% down ($2000), you mortgage payment would be $ 181. (figured at current March 2012 interest rate of 4%)
Your total monthly payment would be: 462 + 181 = $ 643. which is a 49% debt to income ratio. Some banks will allow that, depending on your credit. But you must remember that to qualify for an FHA loan you'd have to add an insurance payment, since FHA requires for you to carry insurance, which is, say, $500/year, 500/12=42/month. The insurance payment will bring up your total monthly payment to $685, which would most definitely not be okay with a lender.
You can afford a much more expensive house than a condo. A condo may only be listed for $40,000, but the condo fee of $300 can easily tip the ratio over the top, making the purchase impossible.
Example 2:
A house listed for $70,000, tax $1700
Say you go FHA and put $2450 (3.5%) down
Mortgage payment: $ 322.
Tax: $ 142.
Insurance: $ 50.
------
$ 514. /mo
The debt to income ratio in this case is only 39%, which is under the 41% and you are perfectly fine.
3. FHA and conventional Appraisals
Banks require appraisals for both types of loans, but the FHA appraisal is much more strict, and often downright ridiculous. The rules say that the house must be livable, but what FHA deems livable, can be just about anything, such as scuff marks on the door, a spot of peeling paint, even a rickety shed in the back yard that no one plans to live in! Once the FHA appraiser has his say, the bank can not lend the money on the property until every little thing specified in the appraisal report is fixed. A seller is asked to fix those problems. Asked does not mean he will do it. He may not want to, the sale will fall through, and you lose the $500-$600 you paid for the appraisal. You are not getting it back, so always be ready for that curve ball. Hiring an inspector to check out the property before the appraiser goes out would cost you about $300, which you'll never get back either, and, normally, an average inspector will not be able to come up with all the things the appraiser will dig up - often an inspector wold dismiss those items as unimportant. And they do seem totally unimportant, considering the FHA basic requirement is for a property to be livable. Now, how does a scuff mark on the door make it unlivable, I'd like to know! It often seems like an FHA appraiser enjoys "playing god" and putting as many spokes in your wheel as possible. I have experienced this first hand!
An appraisal for a conventional loan is more realistic and, basically, just considers the value of the property and the values of the surrounding similar homes. A conventional appraisal is also cheaper ($350).
If you so much as suspect that the house you are purchasing is in need of some repairs, however slight, you might want to start out from the very beginning as an FHA 203K - an FHA rehab loan. A 203K loan will allow you to finance whatever ridiculous repairs an appraiser will dream up of into the amount of the loan. But look at the properties a bit cheaper, and do your best to estimate the cost of repairs, so you can allow for the increase of the monthly payment and still stay within the debt to income guidelines!
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