FHA Mortgages
An FHA loan allows you to buy a house with as little as 3% down, instead of the higher percentages required to secure many conventional loans. Taking advantage of the FHA loan program is a great way for first time buyers, or anyone with a shortage of down payment funds, to buy a home.
The FHA does not make home loans--it insures them. If a home buyer defaults, the lender is paid from the insurance fund. To get an FHA home loan, you'll need to have a good credit history, and sufficient income to qualify for the loan.
How Much FHA Loan Can You Afford?
For an FHA loan, your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together, and referred to as PITI.
Example
Monthly income X .29 = Maximum PITI
For a monthly income of $3,000, that means
$3,000 x .29 = $870 Maximum PITI
Your total monthly costs, adding PITI and long term debt, should be no more than 41% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.
Example
Monthly income x .41 = Maximum Total Monthly Costs
For a monthly income of $3,000, that means
$3,000 x .41 = $1230
$1,230 total - $870 PITI = $360 allowed for monthly long term debt
The ratios for an FHA loan are more lenient than for a typical conventional loan. For conventional home loans, PITI expense cannot usually exceed 26-28% of your gross monthly income, and total expense should be no more than 33-36%.
Qualifying for an FHA Loan
- To obtain an FHA loan, you must have a credit background that shows you meet your obligations.
- You must have enough income to pay your monthly debt, as outlined on page 1.
- You must have enough cash to make a down payment at the time of closing.
- You must be able to pay the closing costs, which normally total 2-3% of the price of the home. These costs might include homeowner's insurance, attorney's fees, fees for a title search and title insurance, Private Mortgage Insurance if you are paying less than 20% down, the loan origination fee, and a fee that goes into the FHA insurance fund.
- You might also be paying 'points,' to the lender. Each point equals 1% of the cost of the home. Sometimes a seller will agree to pay your points, and sometimes points can be financed.
