Getting an FHA loan is one of the most popular options for first-time homebuyers or those with lower credit scores who want to purchase a home with a low down payment. But how do you know how much house you can actually afford with an FHA loan? There are a few key factors to consider.
Calculating Affordability With FHA
When getting an FHA loan, lenders will look at your debt-to-income ratio using FHA’s 31/43 guideline. This means:
- Your monthly mortgage payment (including property taxes, insurance, etc.) cannot exceed 31% of your gross monthly income
- Your total monthly debts including your mortgage cannot exceed 43% of your gross monthly income
So for example, if you make $4,000 per month before taxes, your maximum monthly mortgage payment would be $1,240 ($4,000 x 031) And your total debts including your mortgage payment cannot exceed $1,720 per month ($4,000 x 0.43).
FHA also sets limits on the maximum loan amount you can borrow based on median home prices in your area. The FHA loan limits vary by county but generally range from around $300,000 to $750,000.
Down Payment Options
One major benefit of an FHA loan is that you can qualify with just a 3.5% down payment. So if you were purchasing a $250,000 home, your minimum down payment would only need to be $8,750.
If your credit score is between 500-579, you can still potentially get approved for an FHA loan but may need at least a 10% down payment.
Impact of Interest Rates
The interest rate you receive on your FHA loan can significantly impact your purchasing power. The higher the rate, the more expensive your monthly mortgage payments will be.
Most applicants with credit scores of 580+ will qualify for an FHA loan but your exact interest rate will depend on your specific credit profile. Those with higher credit scores in the mid 700s can potentially get lower rates making a more expensive house affordable.
Other Costs To Factor In
In addition to your down payment and monthly mortgage payments, make sure you account for these other costs when calculating FHA affordability:
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Mortgage insurance premiums (MIP) – You’ll need to pay an upfront MIP at closing of 1.75% of your loan amount, as well as an annual MIP included in your monthly payments. This premium is higher than conventional loans.
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Closing costs – Expect to pay around 3-5% of the total loan amount in origination fees, appraisal fees, and other closing costs. Closing costs can be financed into your mortgage for FHA loans.
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Property taxes and insurance – Your monthly payment will need to cover your property taxes as well as homeowner’s insurance. Get estimates on what these will cost you annually.
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HOA fees – If purchasing a condo or townhome, account for HOA dues in your monthly housing budget.
Tips for Maximizing Affordability
Here are some tips to help you get the most house you can afford with an FHA loan:
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Save for a bigger down payment – Putting down more upfront if possible can lower your monthly payments and allow you to qualify for more house.
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Look at different term lengths – Getting a 15 or 20 year mortgage instead of a 30-year loan can mean lower interest rates and lower overall costs.
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Improve your credit – Aim for a credit score over 740 before applying to get the very best rates. Pay down debts and correct any errors on your credit reports.
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Minimize other debts – The lower your existing monthly debts like car loans and credit cards, the more mortgage you can be approved for. Consider paying down high interest debts first.
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Shop around with lenders – Compare FHA loan rates and fees across multiple lenders to make sure you get the best deal. Online lenders sometimes offer lower rates.
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Consider down payment assistance programs – There are programs in many areas to help cover some or all of your down payment costs if eligible.
Get Pre-Approved First
Before you start shopping seriously for a home, meet with lenders to get pre-approved and get estimates tailored to your specific situation on how much home you can afford. Pre-approval letters can also give you an edge over other buyers.
The FHA home loan program makes owning a home attainable for many first-time buyers. Follow the 31/43 DTI rule as a starting point for affordability, and work on improving your finances to maximize your purchasing power. Get pre-approved and shop around to find the best FHA mortgage lender for your needs. With some preparation, you can comfortably afford your dream home.
Cost of the home
Start with the sales price of the home you’re looking at. If you’re still in the shopping phase, you can put in a few estimates of the price range you’re considering.
Your down payment is the cash you can pay upfront to buy your home, apart from closing costs. You can input either a dollar amount or a percentage of the purchase price for your down payment in this calculator. FHA loan rules require a down payment of at least 3.5% if your credit score is 580 or above (with additional lender requirements or “overlays” possible). If your score falls between 500 and 579, you’ll need to put down at least 10%.
Your loan amount is generally the difference between the purchase price and your down payment. FHA loans have set maximum loan amounts depending on the area in which you’re buying a home. You can search for the maximum loan amount available where you live.
Your interest rate represents the money you pay to the lender in exchange for allowing you to take out the mortgage. Different lenders may offer different interest rates, so be sure to shop around to find the best rate you can qualify for. Credit Karma can help you compare current mortgage rates. Interest rates are based on a variety of factors, including your credit scores, down payment amount and length of the loan. Higher credit scores typically mean better interest rates, and shorter loan terms usually have lower interest rates as well.
Life of the loan
Your FHA loan will have a set term in years, representing the time it will take you to pay off the mortgage. The maximum loan term for an FHA loan is 30 years, though you can choose a shorter loan term. A 15-year mortgage is another common loan term. Shorter terms usually mean lower interest rates, but your monthly payment tends to be higher because you’re paying off the loan more quickly.
Local and state governments charge property taxes, typically basing the amount you pay on the value of your property. Property tax rates vary across the country. You can find out your property tax rate through your county or state tax assessor’s office. The FHA requires that all such real estate taxes be paid through an escrow account.
Lenders generally require their borrowers to show proof of homeowners insurance. This insurance helps cover the cost to repair damage in the event of a fire, burglary or other unexpected event. This will also be part of your escrow account.
If you’re buying a home in a subdivision or condo community, you’ll generally pay regular homeowners association dues.
NEW FHA Loan Requirements 2024 – How much can you afford? – FHA Loan 2024
FAQ
How expensive of a house can I afford with FHA?
How much do I need to make to buy a $300K house with an FHA loan?
How much do I need to make to buy a 200k house in FHA?
How large of an FHA loan can I get?
How much house can I afford?
To calculate how much house you can afford, use the 28/36 rule. You shouldn’t spend more than 28% of your gross, or pre-tax, monthly income on home-related costs. Additionally, no more than 36% of your monthly income should go towards total debts, including your mortgage, credit cards, and other loans, like auto and student loans.
How can I calculate my monthly FHA loan payment?
To find out your monthly FHA loan payment, use our free FHA mortgage calculator. Our FHA loan calculator estimates your monthly FHA payment and provides a breakdown of your loan costs, including FHA mortgage insurance. Mortgages insured by the Federal Housing Administration require a smaller down payment and have lower closing costs.
How much down payment do you need for a FHA loan?
For a FHA loan, the minimum down payment is 3.5% of the home’s purchase price. Typical down payments range from around 5% to 20%, but the FHA loan requirement is lower.
How do I use the FHA calculator?
To use the FHA calculator, you will need to know how much you can afford to put down on a home and the minimum down payment you expect to make based on your credit score and the loan term. Enter this information, along with the loan term, into the calculator to determine the loan amount.