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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%.
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