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I want to buy a home soon so I can lock in low interest rates, but I live in an area with expensive homes and my credit is a little below average. My income is good and my parents are willing to give me some money for a down payment, so I could afford the payments on a $500,000 home. Is an FHA loan is a good option for me or do I have to use conventional financing?

A lot of home buyers are surprised to learn that FHA loans, even though they have limits, are often available for expensive properties. FHA loan limits are based on the average cost of homes by county, so while in some markets the limit is $417,000, in many places with high-cost housing the limit is $729,750. If you happen to live in Alaska, Hawaii, Guam or the U.S. Virgin Islands, the limit is even higher ($1,094,625) to account for high construction costs. Conventional conforming loans are capped at $625,500 in high-cost areas and go up to $938,250 for Alaska, Hawaii, Guam and Virgin Islands residents.

If you have to borrow above those conforming loan limits, you would need a jumbo loan that typically requires a larger down payment (25 percent or more) and a high credit score. This type of loan would also have a slightly higher interest rate.

Be aware that, even though your parents are giving you down payment funds, you have to put some of your own cash into the down payment if you are using conventional financing, usually at least 5 percent. FHA rules allow all of your down payment to be a gift.

I'm more concerned about your below average credit, though, because this could stop you from qualifying for a conventional loan. Even if you do qualify, your interest rates will be higher than someone with a credit score of 740 or above.

The best way to handle your situation is to meet with a lender who can go over your options for FHA and conventional financing to see which loan product you qualify for and which will best meet your individual financial needs.






 
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