Thanks to Federal Housing Administration (FHA) loans, buying a house is possible for first-time buyers, buyers with a limited down payment, or buyers with limited or unique credit history. Insured by the Federal Housing Administration, their flexible underwriting model can make it easier to purchase a home than a traditional loan.
When you’re determining how much you can afford to spend on a new home, there are several significant factors to consider. The lender you choose, FHA eligibility, and FHA limits all play a large part. Let’s look more closely at how your property budget is calculated.
FHA Loan Limits
The amount the FHA will insure on a home loan is not unlimited; they have a maximum lending amount known as the FHA loan limit. Each year the U.S. Department of Housing and Urban Development (HUD) announces this FHA loan limit, which could be carried over from the previous year, or increased to reflect changes in the housing market.
Each county in the U.S. has a slightly different loan limit, set according to regional factors. Since these limits are calculated at the county level, you’ll want to check the limits for the counties in which you are considering buying. The HUD website has a county-by-county breakdown for you to review.
Your Debt-to-Income (DTI) Ratio
Both the FHA and your lender will have their own DTI ratio requirements when determining how much you can borrow through an FHA loan. These ratios are based on the monthly amount you pay for debts versus your pre-tax income. Two separate DTIs are calculated when the FHA or your lender are determining a borrowing limit for you.
The front-end DTI uses the sum of your monthly mortgage payment, your homeowner’s insurance, and real estate taxes.
The second DTI that’s calculated is your back-end DTI, which takes into consideration all of the factors included in the front-end DTI, plus your other monthly debt payments. This includes credit card debt, student loans, car loans, and so on..
DTI will be an important component in determining FHA loan eligibility.
Exceptions for DTI Ratios
There are ways you might be able to qualify for an FHA loan, even with a higher DTI ratio. A lender can document that there are compensating factors to show that you are a strong potential borrower.
Compensating factors that may excuse a higher DTI include cash reverses that have been verified in documents, residual income or other additional income that’s not reflected in effective income, or demonstration that there’s only a minimal increase in housing payments.
Your Actual Budget
One of the essential factors in determining your property budget is what you’re comfortable with. It's possible that you will be approved for a loan that is more than you need or may become unaffordable over time. A new baby, job loss, a child going to college, moving, and many other factors could change your financial situation. And in addition to monthly bills, you will want to account for all of your other expenses when considering how much to spend on a property. Map out all of these factors so that you can handle changes and unexpected expenses in your budget. Automatically accepting the maximum loan you qualify for may not be the best long-term decision for you.
NASB has been helping FHA loan borrowers for decades, and we can be on your side as you navigate the loan process. Call an expert at 855-465-0753, or contact us here.