Facts About
FHA Home Loans
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.
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