Understanding Loan Terms

Living Paycheck-To-Paycheck But Dream Of Owning A Home? It's Possible With An FHA Mortgage! Here's How

28 September 2018 by Gregory Hall

Part of the American dream is to buy a home. However, that can be difficult when living from one paycheck to the next. According to Bank Rate, only 39% of Americans have enough in savings to cover the expenses of an unexpected $1,000 cost, let alone have enough in savings to pay a 20% down payment when buying a home. But is a 20% down payment necessary? 

A 2017 survey done by Zillow says that only 45% of buyers put 20% or more down when buying their homes, and the Lender's Network says the average down payment on a house in 2016 was about $14,000. But what if you don't have that much in savings? Does that mean you have to wait and continue to struggle to save enough for a down payment when living paycheck to paycheck? Not if you get a FHA mortgage—here's what you need to do.  

Crunch the Numbers 

Before moving forward with your dream of being a homeowner, it's crucial that you take a close look at your financial situation to determine what budget you have to work with and what you can feel comfortable in paying on a mortgage payment every month. This means everything, including the daily expenses that may seem insignificant but that can quickly add up. Keep in mind that you will need to have some type of down payment in order to buy a house. 

FHA mortgages only require a down payment minimum of 3.5% for those with FICO scores of 580 or higher and 10% for those with FICO scores lower than 580. So, crunch those numbers and come up with a plan to save what you will need for the down payment of a FHA mortgage. You may find it necessary to eliminate certain unnecessary expenses or to sign a lease for a rental unit with a lower monthly rent payment so you can save enough for the down payment. 

Check Your FICO Score 

Since there's a significant difference between the down payment requirements for FICO scores higher than 580 versus scores lower than 580, it's important to understand what your FICO score is and how close you are to the cut-off. No, this doesn't necessarily mean that you want a lower FICO score, as that can have implications on interest rates on all of your accounts with various creditors, not just with a mortgage lender, such as causing an increase on the interest rates on your credit cards and a higher interest rate if you need to purchase a vehicle. 

Part of how the FICO score is determined is by the types of credit you have in your report and your payment history. If you don't have enough credit accounts, your score will be negatively impacted. Many people take out personal loans simply to have a credit account in their credit report. However, doing this can be difficult with a low score and when living paycheck to paycheck. Instead, ask your landlord to report your monthly rental payments to the credit bureaus, which can help improve your credit worthiness. 

In conclusion, FHA mortgages are backed by the federal government, so there is little risk to the lenders. Another key difference in FHA mortgages is that there is a requirement for borrowers to pay mortgage insurance as part of the closing costs as well as annually throughout the life of the mortgage. After you've crunched the numbers and improved your FICO score, speak with an FHA mortgage lender to help you determine what price range will suit you and your wallet the best so you can go house hunting for an affordable dream home. 

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