Is an FHA Loan a good, or even valid option for us?

[MasterChief525]

Situation:

My wife and I have been married for about a year now and we want to settle down into a home hopefully sometime in 2015. Up to now, we've been living in a small 1 BR apartment for $500/mo, because it's all we currently need. During this time, I've worked to pay off my debts completely while my wife finished her degree and found full-time work. My wife has alright credit, and I have extremely poor credit due to being a complete idiot when I was 18-20 (I am currently 25).

Numbers:

Income:

• Me: 55k
  Wife: 30-35k

Monthly Income:

• Pre Tax: $7,000
  Post Tax (and other paycheck deductions): ~$4,650

Debt:

• 15k from wife's student loans
  6k remaining on my car.
  We also have two credit cards with $500 limits that are used every month and also paid off 100% every month (the intention being credit improvement).

Current Monthly Bills:

• Rent: $500 (Not sure if relevant, but included anyways)
  Car: $389 - Payment would not normally be this high, but I am working with a lender who agreed to take me on at a higher rate due to my credit. According to my credit report, I've made on time payments for the past two years, but doesn't seem to be reflecting in my CK.com score.
  Car Insurance: $100
  Phones $150
  Bus: $75
  Wife's Student Loan: $145
  Groceries & Misc.: ~$500 to $750

Credit Ratings (Note: these are estimates from CreditKarma, the full reports I pulled from the agencies don't give actual scores without paying):

• Wife 675. Only on the lower side because of little history. The last update showed a +50 point increase.
  Mine is 525. My credit report shows items that sat a long time in collections, and some items that were eventually paid, but still show on the report.

Savings:

• About $3,000
  To clarify, I don't intend to apply for a loan with only $3,000 in the bank, that's just what I currently have. The plan will be to have a $10k emergency fund on top of the 3.5% to 5% down payment prior to applying for anything.

One of the reasons our savings is currently on the lower side is our financial situation has recently improved quite a bit. As of 10/1 I have completely paid off student loans that ate at my credit for years, as well as all other debts I owed (the majority of it was student loans). My wife also started working in her degree field in September adding her entire income to our roster (there was previously nothing). Our ability to save has gone up drastically, as we can now confidently set aside around $2,000/mo. or more. The real savings hasn't kicked in because we've recently picked up some larger items we need for our apartment that we have waited on (dresser, bed, etc.)

I've done a lot of research on FHA over the past two weeks with a lot of mixed feelings from every community. Some say that FHA is a good option for people who 1. Can't afford high down payments and/or 2. Can't qualify for conventional loans due to low credit. Others say that the cost is just too high in the long run with the mandatory lifetime PMI. I really want to get some opinions specific to my situation.

I BELIEVE we would be good with a home in the 150k - 180k range. We live in the suburbs of Cincinnati for reference (it's not very expensive compared to some cities).

I apologize if I've given too much information or left something crucial out. This is my first post.

Obviously the largest issue is my credit. I honestly wouldn't even be posting here if I hadn't read that I MIGHT actually qualify with FHA, so I'm open to any and all advice.

Thanks for reading

[doingitallwrong]

I would say pay off the car loan right away, then the student loans. You might qualify for an FHA loan right now but you really want to avoid PMI, there's no benefit to you and if your apartment is working then getting out of debt (before getting back into it) is a much better plan of action.

You've got $3000 in an EF right now, which isn't the ideal but is a good starting point when you have debt to pay off. If you're able to put $2000 per month additional toward your debt you can knock that out within a year. Then put the $2000 toward your EF for the next few months until you hit your $10,000. Then shift the $2000 toward your downpayment. In another 18-20 months you'd have enough for a 20% downpayment plus closing costs. I know it's a little longer than you wanted to get into a house, but you'll be much better off financially, in both the near and long term, if you do it this way.

You'll also have aged your credit three years. The reports you pulled should tell you when the negatives will fall off (the collections, at least -- I'm assuming they're all paid, none still open?) so if some of them were from several years ago, they may be gone three years from now. If not, they'll be that much farther back and have a little less of an impact. Your score will be higher and you can apply for a conventional mortgage with no PMI or escrow. You should be able to afford a 15-year fixed mortgage and still have plenty of money per month for taxes and insurance, as well as savings for big-ticket items like a new car.

I should add that if you're not currently saving for your retirement, I'd start that right away. In general you should be saving at least 15% of your income for retirement, but there are some different opinions as to the best way to do that. (That's a different discussion, though!) I think it's pretty well agreed that you should contribute up to your company match amount (if any) in your 401(k), at any rate.

[TBH]

Congratulations on turning your finances around! It sounds like you're making all the right moves.

I agree with the previous poster--you will be in much better shape if you hold off on the house, pay off debt, and wait til you have a 20% down payment plus an emergency fund. It doesn't sound like it will take you more than a few years, and imagine being in your own home with a GOOD mortgage, not one that is going to make you feel squeezed between a high loan-to-value ratio and PMI and an interest rate that reflects your bad credit.

Also, once your debt is paid off you should be thinking about saving for your next car as well. You don't ever want to get a car loan again.

You may be able to do some more work on your credit as well. Call the companies you've paid off and ask them to make sure your account shows as paid in full. And I think it might be worth it to pay for a credit report so you can see the real number. CK.com is good for an overview but isn't the end all and be all.

[ua_guy]

The lifetime PMI is the new killer in FHA loans. That rule was instituted last year in 2013; it was formerly 5y or 78% LTV, whichever is longer. Essentially, it's forcing a refinance for those who want to get ahead once they do hit 78% LTV and no longer want to pay PMI, and it's punishing people who aren't able to refinance or pay down their home.

If you're buying your first home, I wouldn't recommend going into it with vehicle debt, anything less than excellent credit (calculate how much a slight change in interest rate adds up over 3,5,7,10 years, etc), and I'd want to have an adequate emergency fund (6 months of expences as imagined if you were living in the home of your choice).

I'd recommend taking this time while you pay off debt to really understand the housing market, nail your debts, improve your credit, save money, and let buying the home be the icing on the cake. This advice is coming from someone who did a fly-by-night job of getting into a mortgage too quickly about 10 years ago. I've learned my lesson, I've turned things around, and I'm here to encourage people to do it better than I did