FHA Loans in Suburban Areas

In 2022, the median home price in Austin was $624,000. That’s a 22% increase over the previous year. As homes become more expensive in Austin proper, an increasing number of potential homebuyers are looking outside the city limits where single family homes are more affordable. In neighboring Bastrop and Caldwell counties, median home prices are much lower —$405,500 and $329,000 respectively.

In addition to looking outside Austin City Limits, first time homebuyers may want to consider applying for a Federal Housing Administration (FHA) loan to improve their purchasing power. In some cases an FHA loan could prove to be the best option, while in other instances a conventional loan might be the best choice for first-time homebuyers. Here we’ll explain just exactly what an FHA loan is, as well as why you might choose an FHA loan over a conventional loan if you’re looking in suburban areas.

What is an FHA loan?

The FHA loan is perhaps the most popular government sponsored mortgage. FHA loans are intended to help Americans afford homes who otherwise might be priced out of the housing market, as is increasingly the case in the Austin area. These types of mortgage loans are targeted toward first time homebuyers, and buyers those with low incomes or little savings may also qualify—even if it’s not their first home purchase.

Pros

FHA loans are popular because they generally have less stringent financial requirements, which is great if you have less than a perfect credit score. Among the benefits of FHA loans is a lower down payment than the traditional 20 percent. This can be as low as just 3.5 percent depending on your credit score. These loans also allow a higher debt-to-income (DTI) ratio than conventional mortgage loans — 43 percent as compared to 36 percent for traditional loans.

Cons

The downside to these favorable terms is that FHA loans have certain requirements and limitations. First of all, FHA loans dictate that the home purchased meet certain standards, which can limit your options in the Austin area’s already highly competitive housing market. Additionally, there are limits to the amount of money you can borrow. In Austin, the maximum FHA loan is $571,550. Also, due to the low down payment FHA loans also require you to pay an upfront mortgage insurance premium that is 1.75 percent of the total loan, in addition to your monthly payments.

Should you get an FHA loan?

If you’re struggling to put together a down payment for a home in the Austin area, have less-than-perfect credit history, or a higher DTI than allowed by conventional mortgage loans, then an FHA loan might be a great option for you. But aside from those considerations, there are other factors you consider before you choose an FHA loan over other options.

Do you qualify?

First of all, check to make sure you qualify. Generally, FHA loans are extended to first time buyers, but you might qualify even if this isn’t your first time purchasing a house. The U.S. Department of Housing and Urban Development defines a first-time buyer as anyone who meets the following criteria:

• Anyone who has not owned a principal residence for three years. This applies even if you’ve owned a home but your spouse has not. You can still purchase a home together as first-time homebuyers.
• Single parents who have only owned a home with a former spouse.
• A displaced homemaker and who has only owned a home with their spouse.
• Anyone who has only owned a principal residence that wasn’t permanently affixed to a permanent foundation.
• Anyone who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

What is your credit score?

Once you’ve established that you qualify for an FHA loan, the next thing to consider is your credit score. Most conventional mortgage loans require a credit score of at least 640. If your score is at or above the 640 threshold, you might be able to find more favorable loan terms with a conventional mortgage. However, if your score is lower than 640, an FHA might be right for you. With some lenders, you can be approved for an FHA loan with a minimum score of 500, which requires a 10 percent down payment, while a score of 580 may allow you to reduce your down payment to just 3.5 percent.

Where do you want to buy?

As mentioned previously, the maximum FHA loan you can take out for a single-family home in Austin is just $571,550 in 2023. Given that property prices inside the city usually exceed that limit, where you’re looking to purchase your home may play a pivotal role in the type of loan you choose.

In fact, according to the Federal Housing Finance Agency, the number of FHA loans taken out in Travis County have dropped since 2018 as housing prices surged. In contrast, the number of FHA loans in surrounding counties such as Bastrop, Bell, Blanco, Burnet and Caldwell (a.k.a. the Austin suburbs), have seen a marked uptick.

What kind of house do you want?

The type of house you’d like, whether it be move-in ready or a fixer upper, can also determine what type of loan is best for you. Unlike conventional mortgage loans, in order to qualify for an FHA loan the property in question must meet certain minimum standards. These break down into three primary categories:

• Safety: The property will provide its inhabitants with a safe and healthy environment.
• Security: The property should offer protection to its occupants.
• Soundness: The property should not have any structural defects that would impact its ability to provide safety or security.

These requirements can limit the number of houses you can consider, which isn’t great if you’re hoping to buy a fixer-upper at a bargain price inside Austin city limits and work on it yourself. You might be better off looking in the suburbs for a move-in ready property in order to take advantage of the terms of an FHA mortgage.

Choose the Loan That’s Right for You

There are lots of factors to think about when deciding which type of mortgage is right for you, especially when you’re looking for a home in the Austin area. While conventional mortgage loans may often have favorable terms for buyers with a good to excellent credit score, an FHA loan can help if you’re still finding it difficult to afford a home. If you’re a first-time buyer, have a less than perfect credit score and are looking for a property in the Austin suburbs, find a local mortgage expert that can walk you through what an FHA loan can—and can’t—do for you!