Applying for an FHA Loan: How Much Can You Qualify and Afford?
Did you know FHA loans are easier to qualify for than conventional loans?
They also have lower interest rates and require smaller down payments than their counterparts. But you may be wondering: How much can you qualify for? Better yet, how much can you afford?
Read on for the answers to those questions and how you can secure an FHA loan.
How Much FHA Loan Can I Qualify For?
As you may know, a conventional loan requires a 20% down payment. That means if you want to buy a $200,000 house, you’ll need to put down $40,000 for your down payment.
FHA loans are much less stringent. You will be required to give a 3.5% or 10% down payment. Which figure you pay depends on your credit score. If your credit score is 580 or above, you only need a 3.5% down payment while a score below 580 will require you put 10% down.
If you are applying for an FHA loan with your spouse or another applicant, both credit scores will be considered. The lower score will decide which of the two down payments, 3.5% or 10%, you will be required to make.
Your debt-to-income ratio is another important criterion for your lender. Your DTI ratio provides a quick view of how much debt you are carrying relative to your income.
Determining your DTI is pretty simple. Just follow this process:
- Add up all your monthly gross income (before tax).
- Add all the expenses of your prospective house. This includes the mortgage principal and interest, taxes, insurance, HOA dues, etc.
- Add all your monthly credit payments to the number you came up with for your housing expense. Account for your credit card, auto, and loan payments, but not your living expenses like utilities and entertainment.
- Divide this number by your gross income. That is your DTI ratio.
To qualify, your DTI must be no more than 43%. Generally speaking, the lower your score is below 43%, the higher loan amount you can secure.
Finally, your bank will consider other factors commonly reviewed in a loan approval process. For example, they will look at your credit history and the types of credit you have, as well as how much cash you have in reserves.
How Much Can I Afford?
If the numbers are right, banks will often approve you for a higher mortgage than you can afford.
But if you get a loan for more than your budget allows, you can run into financial trouble. This is especially true if you lose your job or encounter a major change in your life. You will risk missing payments and, even worse, foreclosure.
That’s why it’s important to take a look at your finances to see what you can actually afford.
To that end, add up all your non-housing related expenses. Include everything, such as your credit accounts, auto insurance, gas, entertainment, groceries, and so on.
When you compare it to your overall income, how much money is left over? Is there enough to pay for the FHA loan, plus all home-related expenses?
Is there room for emergencies and unforeseen circumstances, such as the loss of a job or a major injury or illness?
You can’t control when setbacks will happen, but you can plan for them. Make sure you have financial breathing room for when life takes an unexpected turn.
The Bottom Line About Applying for an FHA Loan
It’s important to have your financial house in order before applying for an FHA loan.
Make sure your DTI is well below 43% and improve your credit score if need be.
Have some cash in reserves. Not only will the bank take a look at that, it’s just a good practice.
Know how much you can afford and stay within your budget. With everything in place, you can move forward with confidence towards a new FHA loan.
Ready to get started? Let us help you with our new Ultimate FHA Underwriting Checklist.
He is an experienced presenter on affordable housing topics including FHA, VA, and conventional home loan programs.
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