There are two basic formulas commonly used by lenders to
determine how much of a FHA mortgage you can reasonably afford. These
formulas are called qualifying ratios because they estimate the amount of
money you should spend on mortgage payments in relation to your income and
other expenses.
It is important to remember that the following
ratios are guidelines. Each application is handled on an
individual basis.
Generally speaking, to qualify for FHA loans, the monthly
housing costs ratio is 29% to 35% of your gross monthly income. Monthly
housing costs include the mortgage principal, interest, FHA mortgage
insurance, property taxes and home insurance, often abbreviated PITI. In
addition, if you buy a home with a Homeowners Association there will be a
monthly fee often called HOA dues. For example, if your annual income is
$30,000, your gross monthly income is $2,500, times 33% = $825. So you
would probably qualify for a FHA home loan that requires monthly payments
of $700 (P.I.T.I)..
The second qualifying formula and most important, is total
monthly expenses. The formula is determined by totaling your proposed
monthly housing costs (P.I.T.I) and reoccurring monthly bills such as
credit cards, car or student loan payments. Monthly credit card payments
and any expenses( car, installment or student loans) that extend 12 months
or more into the future are termed long-term debt. The total monthly
costs, including PITI and all other long-term debt, should equal no
greater than 41% your gross monthly income. Using the same example, $2,500
x 41% = $1,025. So the total of your monthly housing expenses plus any
long-term debts each month cannot exceed $1,025.
Want to obtain an estimate on your FHA loan
qualifications ?
If you do not met the qualifying guidelines, FHA allows a
parent or relative to co-sign. Contact our office for details.
When budgeting to buy a home, it is important to allow
enough money for additional expenses such as maintenance and insurance
costs. If you are purchasing an existing home, gather information such as
utility cost averages and maintenance costs from previous owners or
tenants to help you better prepare for homeownership.
Homeowner's insurance or property insurance is another
cost you will have to consider. The lending institution holding the
mortgage will require insurance in an amount sufficient to cover the loan.
However, to protect the full value of your investment, you might want to
consider purchasing insurance that provides the full replacement cost if
the home is destroyed. Some insurance only provides a fixed dollar amount
which may be insufficient to rebuild a badly damaged house.
Two Key Factors in Qualifying for a Home Loan
In attempting to approve home buyers for the type and
amount of mortgage they want, lenders basically look at two key factors:
the borrower's ability and willingness to repay the loan. Ability to repay
the mortgage is verified by your current employment and total income.
Generally speaking, lenders prefer for you to have been employed at the
same place for at least two years, or at least be in the same line of work
for a few years. Willingness is related to how you have fulfilled previous
financial commitments, thus the emphasis on the credit report or rent and
utility bills.
It is important to remember that there are no rules carved
in stone. Each applicant is handled on a case-by-case basis. So even if
you come up a little short in one area, perhaps one of your stronger
points will make up for the weak one. Everyone involved in real estate is
in the business of selling homes, in one way or another. Therefore, if the
loan makes sense, lenders and insurers will do their best to see that you
qualify.
By its very nature, FHA loans provide home affordability,
because it allows families to purchase homes with less cash on hand. FHA
plays a central role in helping low- and moderate-income families become
homeowners.
What Financial Documentation Will Be Required ?
The loan approval process generally begins with a lender
reviewing your income, assets and credit history. You will need to supply
information to verify your income and assets used to buy a home.
It is best to obtain a pre-approval before house hunting
to determine in advance what price range you can realistically afford and
the mortgage amount for which they can qualify.
To
obtain a pre-approval CLICK HERE to use our online application.
Financial information for a home loan.
-
A purchase contract for the house (if you have one)
-
Copies of your bank bank statements covering the most
recent 2 month period.
-
Copies of pay stubs for a one month period, Copies of W2
withholding forms for a 2 year period.
-
Federal tax returns for two years are required if you
are self employed, receive a pension or social security. In addition, if
you wish to, include income from interest or dividends, rental income or
alimony, 2 years federal tax returns will be required.
-
Profit and loss and balance sheets if you are self-
employed
-
Landlord name and telephone number if currently renting.
-
Divorce settlement papers, if applicable
-
Gift letters, if you are using a gift from a parent or
relative to help pay the down payment and/or closing costs. This letter
simply states that the money is in fact a gift and will not have to be
repaid. A copy of the bank statement from the gift donor showing the
ability to provide a gift is required. FHA loans allows gift funds for
the entire down payment and closing costs. We will provide to you the
gift letter form.
Having these items on hand when your typed loan
application arrives will help speed up the application process. There
is no fee for a pre- approval
After submitting your online application we will run your
credit report and analysis the supplied financial information.. Upon this
review we will notify you regarding the maximum sales price, loan amount
and interest rate.
What Kind Of Property Can I Buy With A Low Down Payment
Loan?
There are few restrictions regarding the type of home you
may buy with a low down payment loan. In addition, low down payment loans
may be used with the wide variety of mortgages. If you are buying a condo
the project must have been approved by FHA
Besides price range, there are many other factors to
consider when purchasing a home. It's in your best interest to take care
in selecting a home that will have lasting value as well as provide
shelter. Be sure the neighborhood and house meet the needs of your family.
If you have children, you may want to know if there are other children in
the neighborhood and what schools or playgrounds are nearby. Also consider
the availability of public transportation and how far family members will
have to commute to work or school.
Check on the condition of the plumbing, heating and
electrical systems and whether they are up to code regulations. The best
and easiest way to do this is through a certified home inspection, from a
certified inspector.
If you are like most people, a home is the single largest
purchase you will ever make. It is important that you select a home that
will meet your family's needs and keep you happy for years to come. And
most important, you must be able to afford to remain in that home for as
long as you please.
