Sunday, 13 October 2019

How Much Money Do You Need To Buy a House With an FHA loan?

FHA loan

I am going to show you how much home you can afford using an FHA loan, FHA stands for federal housing administration, it's a federal program that lowers the bar a bit for mortgages so that more people would qualify for mortgages. I mean, people would don't have more money can own a house.

Let's Get Started

Can't Afford 20% Down

Now, a lot of people cannot afford a 20% down payment, even on a $250,000 house, that amounts to $50,000 in cash that you have to have, if you don't have that kind of downpayment, then FHA loan could be a way for you to obtain a home.

Low Credit Score/Bankruptcy/Foreclosed

Another thing that can keep you from getting a regular mortgage is if you have a really low credit score, but not too low, you can go down to about 500, but then if you go down to that much you will have other requirements. If you have a bankruptcy or got foreclosed upon, there are other requirements that you have to meet in order to get an FHA loan.

Can't Get Approved For PMI (private mortgage insurance)

If you don't have 20% down in a regular mortgage, you have to pay a thing called PMI which is private mortgage insurance. It ensures the lender on the portion of the 20% that you cannot pay. Now, getting a PMI requires it's own approval process and if you cannot get that. That means you might have to fall back to getting an FHA loan.

This FHA program is great and it lowers the requirement of a typical mortgage, but you have to understand, it doesn't lower and you get it for free, it does not come for free, you are paying for the privilege of having lower requirements.

Due to all the insurance payments, you are paying to the FHA, you are actually paying more for the same exact home compared to a person with a better credit score that is getting it through a regular mortgage.

Check out this long list of requirements in order to get approved for an FHA loan. 

It's understandable why the FHA puts this kind of requirement in order to get approved for a loan because they are the insured for you. They are insuring against you from defaulting on the loan.

If you ever default and you cannot pay back, they will be responsible for that portion of the loan. Let's go through these requirements and lets me just say that these requirements are not completely set in stone. 

Usually, if you have some reason for something, they would actually let it pass, for example.

Steady Employment For Two Years

If you have some other reason why or you can prove that your position is actually steady without going through 2 years, then they might let that pass.

  1. You need an SSN (Social Security number? 
  2. You need to be United State Lawfully
  3. You need to be of legal age

3.5% down minimum:  

This depends on your credit score. If you have a 580 credit score and above, you can go all the way down to 3.5%, however, if you have a really terrible credit score of all the way down to 500, then you are required to put in 10%. Not to mention that the percent down you put in, affects greatly the insurance that you have to pay. I will go over that later.

  • Only For Primary residence: Which means you have to live in it. 

Property Most Are Approved by FHA Approval: 

If you get approved for an FHA loan, you need the property approval by an FHA approver, this approver needs to be from their organization.

Front End Ratio 31%: 

Which is just a percentage of your income? it's just how much you can take in order to pay for the house, for the mortgage, for the HOA fee, property tax, mortgage insurance, homeowner insurance, you can go all the way up to 31%. But they would allow you to go all the way up to 40%.

Back End Ratio: 

This is how much you pay for a mortgage and all your debt, including, credit card debt, your car payments, your student loan, everything added up. Let's say you add up all of these debts that you have, it cannot exceed 43% of your income 

2-years Our Of Bankruptcy:

If you happen to went into bankruptcy, you need to be 2-years out of bankruptcy before you can qualify for this loan. 

3-years Out Of Foreclosed:

If your previous home somehow you got foreclosed upon, you got kicked out and you go to rent or something, then you have to wait for 3-years after this foreclosure event. Before you can apply for an FHA loan and get a new home.

The Property Must Meet Minimum Standard:

They have a set of standards, you can't have a little hut of property and then you can get a loan on it. They want to be able to sell this thing if you ever default, so, it becomes a lot easier for them to liquidate things. It's like protection on their end, they want things to look good and the property is actually worth something.

Quite a bit of requirement there. 

How you can calculate how much home you can afford.

Upfront Mortgage Insurance Premium = 1.75%

You might wonder what this FHA loan thing is going to cost you. Well, to start off with, when you get the loan, you have to pay a lump sum. It's called an upfront mortgage insurance premium. And it comes in at 1.75% of your mortgages. 

If you pay for a $250,000 house, if that is your mortgage amount after the downpayment and stuff, then you have to pay $4,375. This amount is given to them and you don't get it back. It's not paid into the mortgage or anything, the $4,375 is just a fee.

You can pay instantly if you have that kind of money laying to put on top of whatever downpayment that you pay. 3.5%, 10% or whatever, or you probably don't have that kind of money because you are trying to go for a low downpayment, so, you are going to roll that $4,375 into the mortgage 

Monthly Fees

On top of paying a lump sum, you also have to pay for a monthly fee. This is on top of the interest rate that you are paying on your mortgage. I have another article about How Mortgage Interest Works

Also, read: Who Can Qualify For An FHA Loan?

Just got through that article and see how much monthly payment you can afford

I hope this article was not too completed

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