How Much House Can I Afford?
![[Photo: A senior couple]](../../fha/images/photos/2007-06-01h.jpg)
How Much House Can I Buy With My FHA Mortgage?
What have you heard about qualifying for an FHA Loan?
- Only inexpensive houses are allowed? Not true!
- You need a lot of money for a down payment? Not true!
- You need perfect credit? Not true!
- Your credit score has to be at least 650? Not true!
- If you ever declared bankruptcy or had a foreclosure, you're out of luck? Not true!
None of these things are true. To decide the price of the house you can buy we look at:
- Your income
- Your other monthly expenses
- Your credit history (this is important, but FHA's credit standards are very flexible)
- Your overall pattern rather than the individual problems you may have had
Your lender will be responsible for determining if you qualify for an FHA loan, but the information below will help you understand the process.
There's one thing you must be prepared for, your lender will need a lot of information from you. Don't let the lender's requests upset you. They're just doing their job, and it will all pay off. Once you're in your new home, it will all be worth it! They must know:
- How much you earn
- Where you've worked
- Whether you're single, married or divorced
- If you've had credit problems in the past, they'll need to know why
While only a lender can actually qualify you for a loan, if you follow the steps outlined here, you should get a pretty good idea of whether you might be approved. You might even become pre-qualified for an FHA loan right here!
FHA Loan Basics - (Top)
Here are a few key facts about FHA loans:
Maximum loan amount: By law, FHA cannot insure loans that exceed certain amounts based on the metropolitan area or county in which you live. The highest maximum FHA mortgage right now is $362,790. The lowest maximum amount is $200,160. To see what the limit is in the place where you want to live, go to the FHA Maximum Mortgage Limits (link to: https://entp.hud.gov/idapp/html/hicostlook.cfm. This site lists U.S. territories as states.
Maximum financing: Depending on the state where the property is located, the maximum FHA financing will be either 98.75% or 97.75% of the appraised value of the home or its selling price, whichever is lower.
Cash required: FHA requires that the homebuyer invest at least 3% of the sales price in cash for the down payment and closing costs. If the sales price is $100,000 for example, the homebuyer must invest at least $3,000. However, the homebuyer can use gifts from family, funds from local, state or government agencies, or other sources for the down payment. Non-FHA loans may not allow this.
Okay. Let's get started.
Eligibility for an FHA Mortgage - (Top)
The first step is meeting FHA's basic eligibility requirements. These involve some very general requirements that are pretty easy for most people to meet. The second part is meeting the qualification requirements. This is where your income, your credit history and your savings are evaluated. It's a little more complicated than basic eligibility, but don't worry. Millions of people qualify for mortgages every year, and you can too!
Generally, to be eligible for an FHA loan, you must:
- Have a valid Social Security Number (SSN)
- Be a legal resident of the United States
- Be of legal age to sign a mortgage in your state. There is no maximum age limit for a borrower.
Even if you are a U.S. citizen, you must still have a valid Social Security Number (SSN). An individual Tax Identification Number (ITIN) is not an acceptable substitute for a SSN.
U.S. citizenship is not required for eligibility. When you indicate on your loan application that you hold something other than U.S. citizenship, the lender must determine your residency status from the documentation you provide. If you are a permanent resident alien, you must provide evidence of lawful permanent residency issued by the Department of Homeland Security, Bureau of Citizenship and Immigration Services (BCIS), formerly the Immigration and Naturalization Service (INS). If you are a non-permanent resident alien, you must show that you are eligible to work in the U.S. by producing an Employment Authorization Document (EAD) issued by BCIS.
Qualifying for an FHA Mortgage - (Top)
Your lender will decide if you qualify for a mortgage based on the "Four 4 C's of Credit":
- Credit history
- Capacity to repay
- Cash to close
- Collateral
Your credit history involves what you've borrowed in the past, and how well you've paid it back. Capacity refers to your income and your ability to handle the monthly housing payments. Cash to close refers to money for the down payment and closing costs. Collateral refers to the home you're buying.
There is one other thing that is important to remember: A lender cannot reject your loan application based on a lack of credit history or your decision not to use credit. If you do not have an established credit history, or if you do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments or other direct reports from credit providers.
Manual vs. Automated Processing - (Top)
It is standard industry practice for a lender to use Automated Underwriting Systems (AUS) to evaluate loan applications. An AUS processes key information like your credit score, your monthly income, how much you want to borrow, how much cash you've saved, and the value of the property you want to buy. Based on this information, the AUS produces a report recommending approval or denial of your loan application.
Manual underwriting involves the evaluation of your information by a person called an underwriter in the lender's office. The underwriter will apply his or her knowledge of FHA underwriting standards to your information, and make a decision to approve the loan or not.
Your lender may use either or both types of underwriting to process your loan, but there's one important thing you need to know: you can't be turned down for an FHA loan just because an AUS report doesn't recommend approval. If the AUS report doesn't recommend approval, it could mean that your loan has to be processed manually.
FHA Pre-qualification Form - (Top)
To see if you might qualify for an FHA mortgage, complete the FHA borrower qualifying worksheet below. If you enter accurate information about your personal finances, and honestly answer some questions about your credit history, you'll earn an FHA pre-qualification letter like the one below. You can provide this form to lenders and real estate agents when you're shopping for a home.
If you don't already know your credit scores, you can request a credit report at https://www.annualcreditreport.com/cra/index.jsp. For more information about your credit and free credit reports, visit the Federal Trade Commission's web site at www.ftc.gov/bcp/conline/edcams/credit/index.html.
FHA Qualification Worksheet - (Top)
This sheet will help you see how you do with the "Four C's of Credit."
Credit history
Answer the following questions to see what kind of credit history you have.
| Credit Question |
Answer |
| Have you filed for Chapter 7 bankruptcy in the past two years or Chapter 13 bankruptcy in the past year? |
Yes
No |
| Have you experienced a foreclosure in the past three years? |
Yes
No |
| Are you currently delinquent on any Federal debts such as Department of Education student loans? |
Yes
No |
| Do you currently have any outstanding judgments against you? |
Yes
No |
| Are you currently late on your rent or mortgage, or have you frequently been late in the past two years? |
Yes
No |
| Are you currently late on any of your credit card, car loan or other payments, or have you frequently been late in the past two years? |
Yes
No |
Capacity
Use the following tables to estimate your monthly income and debts:
| Income Category |
Monthly |
| Your salary |
$ |
| Your spouse's/partner's salary |
$ |
| Pensions/social security |
$ |
| Other income |
$ |
| Total monthly income |
$ |
| Debt Category |
Monthly Payment |
| Credit card/car loans |
$ |
| School loans |
$ |
| Alimony/child support |
$ |
| Other debts |
$ |
| Total monthly payments |
$ |
Cash You Have to Buy a Home:
Use the following savings categories to estimate your current savings:
| Savings Category |
Amount |
| Savings account |
$ |
| Checking account |
$ |
| Retirement fund contributions |
$ |
| Other savings |
$ |
| Total savings |
$ |
Collateral
The price of the house that you can afford will be based on your current monthly income and your current monthly debts.
How Much House Can I Afford?
Using the information you entered in the tables, use our simple mortgage calculator at www.ginniemae.gov/2x_prequal/detail_Questions_1.asp to determine how much mortgage you can afford. If the amount you can afford is a lot less than the cost of homes that interest you, then you might want to wait a little longer to start looking for your home.
But before you give up, why don't you contact a real estate professional or a free or low-cost HUD-approved housing counseling agency to help you evaluate your loan potential. A real estate professional and/or a housing counseling agency will know what kinds of mortgages lenders are offering and local down payment help and can help you choose a lender with a program that might be right for you.
Another good idea is to get pre-qualified for a loan. That means you go to a lender and apply for a mortgage before you actually start looking for a home. Then you'll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams!
FHA Qualification Letter - (Top)
FHA PREQUALIFICATION LETTER
DATE
__________________________________________________ HAS COMPLETED AN ANALYSIS OF HIS/HER PERSONAL FINANCES AND CREDIT HISTORY. BASED ON THIS INFORMATION, AND SUBJECT TO FORMAL VERIFICATION AND ANALYSIS BY ANY FINANCIAL INSTITUTIONS TO WHICH HE/SHE MAY APPLY, HE/SHE IS QUALIFIED FOR AN FHA-INSURED MORTGAGE OF $ ______________________.
If the applicant also obtained their credit scores and received an "Accept" recommendation from the TOTAL Scorecard, the following paragraph would also appear:
__________________________________________________ HAS ALSO ENTERED HIS/HER CREDIT SCORES AND OTHER INFORMATION INTO FHA'S TOTAL SCORECARD AND RECEIVED A RECOMMENDATION OF ACCEPT. THE FHA TOTAL SCORECARD RECOMMENDATION IS ATTACHED.
THE CREDIT HISTORY, INCOME, EXPENSES AND SAVINGS ON WHICH THIS PREQUALIFICATION APPROVAL ARE BASED ARE ATTACHED. QUESTIONS ABOUT THIS PREQUALIFICATION APPROVAL MAY BE REFERRED TO THE FHA RESOURCE CENTER AT 1-800-CALL-FHA.
SINCERELY.
FHA COMMISSIONER
