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Can you afford an FHA loan?
FHA loan requirements are flexible. You don’t need a large down payment or a high income to qualify.
The exact amount of money you’ll need for an FHA loan depends on factors like your home price and location.
But, in general, you need only 3.5% of the purchase price for a down payment and 2–4% for the closing costs.
So saving at least 7–8% of your target home price is a good place to start if you want to qualify for an FHA loan.
Verify your FHA loan eligibility. Start here (Dec 29th, 2021)
In this article (Skip to…)
How much money do you need for an FHA loan?
FHA loan costs can be separated into three main categories:
- Your down payment amount
- Your closing costs
- Your monthly mortgage payment
The exact amount of money needed – both in terms of savings and income – will vary from one borrower to the next. And it largely depends on the price of the home you’re buying.
That’s because the size of your down payment is calculated as a percentage of the home price. Closing costs are largely calculated based on the home’s value, too.
Of course, once you’ve moved in, you’ll also make monthly mortgage payments. These include principal and interest on your home loan as well as mortgage insurance, property taxes, and homeowners insurance. (Plus HOA dues if you buy a condo or townhome.)
Your lender will want to be sure that you have sufficient income – after you’ve paid existing debts and obligations – to comfortably afford those monthly payments.
Verify your FHA loan eligibility. Start here (Dec 29th, 2021)
FHA loan costs: How much will you pay?
We’ll get to some dollar examples below. But first, let’s explore the costs we mentioned earlier. Because those will determine how much you need to save and earn to afford an FHA mortgage.
Down payment (3.5%)
The Federal Housing Administration says the smallest down payment you can make is 3.5% of the sale price. So you need to save at least:
- $3,500 for a $100,000 home
- $7,000 for a $200,000 home
- $10,500 for a $300,000 home (and so on)
Keep in mind that the down payment doesn’t always have to come from your own savings.
FHA allows home buyers to cover part or all of their down payment using gifted money or a down payment assistance program. DPA programs are available in every state and in many individual cities, counties, and communities as well.
Many home buyers qualify for down payment assistance if they have low or moderate income and want to buy a modestly–priced house. You can ask your mortgage lender to help you find and apply for DPA options in your area.
Connect with an FHA mortgage lender today (Dec 29th, 2021)
Closing costs (2–4%)
FHA loan closing costs typically come in between 2% and 4% of the loan value. Occasionally, they can be as high as 6%.
That’s a huge range. And some of it comes down to how much you’re borrowing. That’s because it costs a lender the same to originate a $900,000 loan as a $100,000 one. So the bigger your loan amount is, the smaller the percentage you’re likely to pay.
However, when we surveyed The best FHA mortgage lenders, we found big differences between the closing costs each lender charged. Some offered lower costs in exchange for a higher mortgage rate and vice versa. But a few offered low rates and low closing costs.
So make sure you shop around for your best deal. Get quotes from at least three FHA–approved mortgage lenders to find the best rate and fee combination for your situation.
Upfront and ongoing MIP
All FHA loans come with mortgage insurance, which is an additional cost paid by the borrower to protect the lender in case of default.
FHA mortgage insurance premium (MIP) comes in two parts:
- Upfront MIP – You pay a premium of 1.75% of the loan amount as a one–time fee. Most FHA borrowers roll this cost into the loan amount so they don’t have to pay it upfront at closing
- Annual MIP – You pay a premium equal to 0.85% of the loan amount each year. The annual total is divided by 12 and you pay it monthly as part of your mortgage payment
With a mortgage backed by the FHA, you have to pay MIP for as long as your loan lasts (unless you put down 10% or more, in which case MIP lasts 11 years). And you have to move or refinance to escape the premiums.
If your credit score is 620 or better, you might be better off getting a conforming loan. Because you can stop paying mortgage insurance on those when your equity (the amount by which your home’s value exceeds your mortgage balance) reaches 20%. Oh, and conforming loans require a lower down payment: just 3%.
Check your mortgage options. Start here (Dec 29th, 2021)
How much income do you need for an FHA mortgage?
Lenders are much more concerned with your ability to comfortably afford mortgage payments than with your actual income level. So they’ll be focused on your disposable income (money left over after you’ve paid all your debts) rather than how much you earn.
The industry term for this is your “debt–to–income ratio (DTI).” And it’s calculated by comparing your gross (pre–tax) monthly income with all your monthly debt payments. These include minimum credit card payments and loan installments as well as your future mortgage payment.
Your DTI ratio has a big impact on your loan approval. Someone with a low income and few debts might be approved for a loan while someone with a higher income but lots of existing debt could gets turned down.
FHA loan calculator
You can use the FHA loan calculator below to estimate your future monthly mortgage payment with principal, interest, taxes, and insurance all included. This will help give you an idea of how much money you need to afford an FHA loan from month to month.
FHA loan examples: How much money you’ll need
To give you a more concrete example of how much money you need for an FHA loan, we ran the numbers for two home values: $200,000 and $400,000.
Depending on where you live, $400,000 may sound a lot or a little. But, in the third quarter of 2021, the median home price nationwide hit $404,700. And you can borrow more than that with an FHA loan, providing you qualify.
You can use the FHA loan calculator above to model your own scenario.
We’ve assumed an FHA mortgage rate of 3.474% for a 30–year, fixed–rate mortgage, which was available when this was written. However, that’s likely to have changed by the time you read this. So check our table, which is updated daily, for current FHA loan rates.
Our estimates also assume 4% of the loan value for closing costs. But you should get a quote from a mortgage lender to find out what your actual closing costs will be, as these can vary a lot from one buyer to the next.
FHA loan for a $200,000 home
- Due upfront: $14,860
- Monthly payment: $1,220
What you’ll pay at closing
Here are your figures for a typical cash requirement on closing:
- Minimum down payment: $7,000 ($200,000 x 3.5% = $7,000)
- Possible closing costs: $7,720 (4% of your loan amount, which is $193,000. Find this by subtracting your down payment from your home price)
- Upfront MIP: $3,375 (1.75% of your loan amount, which is $193,000. Most borrowers roll this into the loan amount instead of paying it upfront)
You can normally roll up your initial MIP payment into your loan and pay it down along with your mortgage. Most people do that.
If you do, your total loan amount will be the original $193,000 plus your initial MIP payment of $3,735, which makes $196,375.
Because you’re borrowing more, your 4% closing costs will inch up to $7,855 from $7,720.
So you could close on your FHA loan for a $200,000 home with as little as $14,860. Indeed, if you find a lender that charges lower closing costs of 2%, it might be as little as $10,930.
Remember, if you’re eligible for help from a down payment assistance program, you might get all or some of that paid for you through a loan, forgivable loan, or grant.
Ongoing FHA loan costs
Assuming you’ve rolled up your initial MIP payment into your loan, you’ll be borrowing $196,375. And, remember, we’re assuming a fixed mortgage rate of 3.474%, which may have changed by the time you read this.
Based on those assumptions, our FHA loan calculator says your monthly mortgage payment should be $1,220. That breaks down as:
- Principal and interest: $879
- Monthly mortgage insurance fee: $139
- Property taxes: $162
- Homeowners insurance: $40
Of course, property taxes and homeowners insurance will vary, depending on where you’re buying. And mortgage rates are often different from state to state.
So take these as useful but rough estimates rather than firm figures.
FHA loan for a $400,000 home
- Due upfront: $29,710
- Monthly payment: $2,439
What you’ll pay at closing
Here are your figures for a typical cash requirement on closing:
- Minimum down payment: $14,000 ($400,000 x 3.5% = $14,000)
- Possible closing costs: $15,440 (4% of your loan amount, which is $386,000)
- Upfront MIP: $6,755 (Again, most borrowers don’t actually pay this fee at closing)
If you roll your upfront mortgage insurance into the loan amount, you could close on your FHA loan for a $400,000 home with as little as $29,710 out of pocket. Indeed, if you find a lender that charges lower closing costs of 2%, it might be as little as $21,860.
Remember, if you’re eligible for help from a down payment assistance program, you might get all or some of that paid for you through a loan, forgivable loan, or grant.
Ongoing FHA loan costs
Assuming you’ve rolled up your initial MIP payment into your loan, you’ll be borrowing $392,755. And, remember, we’re assuming a mortgage rate of 3.474%, which may have changed by the time you read this.
Based on those assumptions, our FHA loan calculator says your monthly payment should be $2,439. That breaks down as:
- Principal and interest: $1,758
- MIP: $278
- Property tax: $323
- Homeowners insurance: $80
Of course, property taxes and homeowners insurance will vary, depending on where you’re buying. And mortgage rates are often different from state to state.
So take these as useful but rough estimates rather than firm figures.
Verify your FHA loan eligibility. Start here (Dec 29th, 2021)
FHA loan cost FAQ
The minimum down payment for an FHA loan is 3.5% of the home’s purchase price for those with credit scores of 580 or higher. If your credit score is between 500 and 579, you need 10% down. But very few FHA lenders allow scores below 580.
Closing costs and lender fees vary enormously from one mortgage lender to the next. They can be as low as 2% of the loan amount or as high as 6%. Most borrowers choose to add an additional, initial mortgage insurance premium of 1.75% of the loan amount to their loan balance. But if you pay the Upfront MIP fee at closing, it will increase your closing costs
That depends on how much you borrow and the mortgage rate you pay. Interest rates are generally competitive with other sorts of mortgages. But you’ll have a monthly charge for mortgage insurance, too. See our examples above.
Lenders get to set their own credit score thresholds. But most follow the FHA’s guidance of 580 or higher. If yours is between 500 and 579, you may get approved with a down payment of 10% or more of the home’s appraised value.
Are you eligible for an FHA loan?
The great thing about the FHA mortgage program is that it’s flexible. The FHA sets minimum requirements, but lenders can often be flexible when it comes to approving borrowers.
As a result, you don’t need perfect credit or lots of cash on hand to qualify with FHA. That’s why this program is so popular with people who need a little extra help getting a home loan.
Ready to check your FHA mortgage eligibility? You can start here by connecting with an FHA–approved lender.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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