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How to Calculate How Much You Can Afford With an FHA Loan

posted in: Mortgages

Getting out of the rental market is one of the best ways to save money each month. With the median cost of rent coming to around $1,827, it’s no wonder many first-time homebuyers are starting their searches now. And with the FHA loan program, qualifying for financing on your first home is possible.

However, since home prices can vary wildly from one neighborhood to the next, you need to figure out how much home you can realistically afford.

Not sure where to start? Don’t panic. Here are a few simple ways to figure out your homebuying budget.

Calculate Your Current Monthly Housing Expenses

Before you start looking at homes, think about how much you’re currently spending on your housing expenses. Add up your rent, insurance costs, and any other fees you pay each month.

Then, think about how comfortable you are making those payments. If you’re struggling to pay your current rent amount, you’ll want to look at homes that will cost you less each month. However, if you’re comfortable with your rent amount, you’ll be able to afford a mortgage payment up to that amount.

Keep in mind that you may not qualify for an FHA loan with a monthly payment equal to your rent amount.

Consider Your Savings

One of the biggest benefits of FHA home financing solutions is that you’re able to buy a home with a down payment of as little as 3.5% of the home’s purchase price. That means you don’t need to have thousands of dollars saved up just to qualify for a loan.

However, the larger your down payment is, the less money you’ll need to borrow to purchase a home. That can help you lower your monthly payment and may encourage lenders to give you a larger loan amount.

Take a look at how much money you’ve saved for your down payment. When qualifying for an FHA loan, you’ll need to save up at least 3.5% of the home’s purchase price. But the more you can use toward your down payment, the easier it will be to qualify for financing and the larger loan you’ll likely receive.

Look at Your Debt-to-Income Ratio

Lenders always want to work with borrowers that are as low-risk as possible. It’s why they look at your debt-to-income ratio when reviewing your loan application. This ratio refers to your total monthly debt compared to how much you earn each month from your job, and any side hustles you might have.

To calculate your debt-to-income ratio, add up your total monthly debts (credit cards, personal loans, auto loans, etc.) and divide that number by your monthly income. Then, multiply the result by 100 to get a percentage.

The higher your debt-to-income ratio is, the more likely it is that you’ll have trouble repaying your mortgage. Low-risk borrowers have debt-to-income ratios of less than 43%. If your percentage is higher, you may not qualify for a large enough loan to buy a property you love.

Know Your Credit Score

FHA loan candidates don’t need perfect credit scores. In fact, you’ll be able to apply for a loan if you have a minimum credit score of 580. But the higher your credit score is, the easier it will be to qualify for a great home loan.

Before you start looking at homes, take the time to check your credit score. You can get your free credit report from sites like AnnualCreditReport.com.

If your score is lower, you may not be able to afford a high-priced home. However, if your score is higher, you’ll likely qualify for a larger mortgage loan, thereby increasing how much home you can afford.

Use a Mortgage Calculator

One of the best ways to figure out how much you can afford with an FHA loan is to use a mortgage calculator to estimate your monthly payments. These calculators allow you to enter different home values, interest rates, and location details to estimate how much that home would cost you each month.

Do this for each home you’re interested in and compare those estimated payments against what you’re currently paying in rent. This way, you’ll be able to narrow down your ideal price range before you start looking at properties.

Once you have those ranges in place, let your real estate agent know. They’ll be able to limit the homes you see to the ones that fit your price range so you can avoid falling in love with a home that’s not in your budget.

Be Mindful of Your Job

Before you can fully decide how much you can afford with an FHA loan, you’ll want to consider your current job. Is it stable, or are you worried about getting laid off or fired? Are your paychecks predictable, or do they fluctuate wildly throughout the year?

If your job is stable and your income is predictable, you’ll be able to afford a larger, more expensive home. However, if your job is on the rocks or you’re worried about your paychecks being stable, you may want to look at homes that you can afford even with your smallest paycheck.

Remember, the goal is to choose a home that you can still afford even if your finances aren’t perfect.

Using an FHA Loan Is a Great Way to Buy a Home

If you’re buying your first house, using an FHA loan is a great way to finance the purchase. Just make sure you follow these steps to make sure you can afford each home you’re interested in.

By sticking to your budget, you’ll make sure you can easily afford your monthly mortgage payments.

If you’re ready to start looking at homes and want to explore your loan options, don’t wait. Get a free quote today and let our experienced team help you find the right loan for your needs.

7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with each mortgage transaction phase. If you are searching for a home loan in New Jersey, Pennsylvania, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.