FHA Loan Calculator

If it's your first time buying a home, you may be unaware of how many costs are associated with homeownership. As you pay your monthly mortgage payments, this amount doesn't just include interest and the loan principal you have to repay the lender. You must also pay property taxes, home insurance, and other additional costs.

This is where the FHA loan calculator comes into play. This loan calculator will determine exactly how much your monthly payment is when factoring in all associated fees. This is the quickest and most accurate way to determine how much home you can afford with an FHA loan.

Perhaps the best part is that the calculator is simple to use. You can enter the corresponding information, and the mortgage payment calculator does the rest. Keep reading to learn more about FHA loans and to see if they are right for you.

Benefits of FHA Loans

Before we discuss the benefits of FHA loans, it's essential to understand what they are and how they work. The Federal Housing Administration insures FHA loans, so they are backed by the federal government of the U.S. but issued by lenders approved by the agency.

This type of mortgage loan was created to help low or middle income families achieve the dream of homeownership. Hence, they are widely popular with first-time buyers. That said, let's take a look at the benefits of an FHA loan.

Lower Down Payment

The most common reason first-time buyers choose FHA loans is that they do not require you to put down as much money as other mortgage loans. Finding a large sum of cash to cover a traditional 20% down payment is a giant hurdle for some people. It serves as a roadblock for many who wish to own a home. On the other hand, FHA loans only require 3.5% down for borrowers with a 580 credit score or higher.

More Flexible with Credit Histories

Just as an FHA loan offers flexibility with the down payment, they do the same with your credit history. It doesn't matter if you're a first-time buyer with little credit history or have a low score due to hiccups; your credit score will likely be too low to qualify for conventional mortgage loans.

Though most lenders require a minimum credit score of 620, an FHA loan is possible for anyone with a score of 580 or higher. Furthermore, if you can save up a 10% down payment, some FHA loans approve borrowers with as low as 500.

Lower Interest Rates

Mortgage rates change frequently and are directly impacted by the state of the nation's economy. However, this doesn't mean you can't find lower rates. As it stands, an FHA loan will usually offer lower fixed rates than other home loans. In some cases, though, you may be provided with adjustable-rate FHA loans.

With these loans, your interest rate is primarily determined by the rates available on the general market when you apply. However, it is also influenced by factors such as credit score, income, down payment, terms, the amount you wish to borrow, and others.

Lower Debt-to-Income Requirements

Your DTI, or debt-to-income ratio, compares your income to your monthly debt. To determine your DTI, calculate every monthly debt you pay, including car and student loans, and divide it by your monthly gross income, or the amount you earn before taxes.

Typically, the lower a person's DTI, the better your lender views you. With FHA loans, your DTI can be as high as 43%, and even this can be negotiated further in some cases. You can also include a cosigner's income with an FHA home loan, even if the person will not live in the house. Including a non-occupant borrower, like a spouse or family member, gives you more flexibility and may be what you need to qualify for your FHA loan.

This is Who Should Obtain an FHA Loan

Are you wondering if an FHA loan is right for you? The most important difference when deciding between an FHA loan and a conventional mortgage loan is that the government does not insure conventional loans. Companies such as Freddie Mac and Fannie Mae, which the federal government sponsors, provide the funds for lenders in traditional loans.

Traditional loans have more requirements, such as higher credit score requirements, a lower DTI, and a larger down payment to qualify. Alternatively, FHA home loans are nonconforming, which means they don't satisfy Freddie Mac or Fannie Mae's purchase requirements.

Typically, FHA loans are ideal for mid to lower-income individuals, as they have fewer requirements than conventional home loans. So, anyone with a lower credit score, less down payment savings, and a higher DTI may still qualify for an FHA loan, which they most likely would not with a conventional mortgage loan.

Yet, regardless of which home loan type you choose, you should be aware of additional costs. Closing costs, for example, refer to all fees associated with securing and processing your loan.These costs vary depending on the type of home you buy and the purchase price, but generally range between three and six percent of the property's value.

Maintenance, which should account for one to three percent of the total purchase price, is often overlooked by first-time buyers. The exact amount of maintenance money you will need varies depending on how old the home is and other things, such as if the house is in an HOA neighborhood. In this case, you'll owe homeowner's association fees annually or monthly.

After considering all of these costs, you may conclude that you will not have enough savings unless you use an FHA loan.

Ultimately, you should know that FHA home loans are perfect for those with less-than-stellar credit backgrounds, first-time buyers, and anyone who can't save up the full down payment amount for a conventional mortgage loan.

FHA Home Loan Requirements

As with any other loan, you must meet the requirements to qualify for an FHA loan. Here's a look at the lending guidelines:

• If your FICO score is between 500 and 579, you'll need a 10 percent down payment, but if your FICO score is 580+, you're only required to put down 3.5 percent.
• You must have verifiable employment over the prior two-year period.
• Your income must be verifiable by federal tax returns, check stubs, or bank statements.
• The loan must finance your primary residence.
• The property must meet HUD (The United States Department of Housing and Urban Development) guidelines and be appraised by an FHA-approved appraiser.
• Your back-end debt ratio, which comprises mortgage and all monthly debts, must be less than 43 percent less of your gross monthly income. (Some lenders round this number up to 50 percent)
• Your front-end debt ratio, which comprises just mortgage loan payments, should be no higher than 31 percent of your gross monthly income.
• If you've filed for bankruptcy, you must wait between one and two years to apply for an FHA loan and three years after a foreclosure. Be sure to ask a lender because some may make exceptions to waiting periods if your circumstances are extenuating.

Disadvantages of FHA Mortgage

Aside from higher upfront and monthly costs, there are several other reasons you may want to avoid FHA loans. Here are some things to consider:

You May Be Ill-Prepared for a Mortgage

Small down payments like 3.5 percent may indicate that you're not fully ready to take on a mortgage loan. If you feel that you're not quite standing on solid ground financially, it may be worthwhile to look at cheaper homes or wait until you're able to save up more of a down payment. Keep in mind that the more expensive the home, the more interest you'll pay, which means your house is much more costly.

Upfront Mortgage Insurance

If you put down less than the traditional 20%, you must purchase mortgage insurance. There are two types of insurance associated with FHA loans. First, there's the upfront fee of 1.75 percent that some borrowers choose to wrap into their loan balance.

As we mentioned, the higher the loan amount, the more interest you're charged, and in this case, you're paying more than 1.75 percent unless you pay the fee at closing. So, remember, bigger loans come with bigger monthly payments.

Recurring Insurance

Aside from the 1.75 percent that's wrapped into your loan, you are also responsible for paying monthly mortgage insurance, which costs anywhere from 0.80 percent to 1.05 percent of the loan balance. The good news is that if you get an FHA loan with a term of 15 years or less, you can get these insurance rates as low as 0.45 percent.

After you've reached over 20 percent equity in your home, this private insurance can be canceled. However, with an FHA loan, you must pay this insurance premium for the first 11 years with a 10% down payment and for up to 30 years with less than a 10% down payment. If you want to eliminate the cost sooner, the best option is to refinance the loan.

Fewer Loan Choices

FHA loans only come with basic options. For most borrowers, the best options are 30-year or 15-year fixed-rate loans. Hence, in many cases, fewer loan choices aren't an issue. However, an adjustable-rate or interest-only mortgage may work better depending on your financial situation.

Housing Limitations

Another disadvantage of FHA loans is that your property choices may be limited. For a property to be approved for an FHA loan, it must meet strict requirements. So if you're looking for a fixer-upper or other bargain home, FHA loans probably won't work.

Alternatively, an FHA loan should be no problem if you are looking at a move-in-ready home. It's also worth mentioning that buying a condo with this type of loan may be challenging. For example, if the owners don't occupy enough units in the condo building, these loans may not be an option.

Seller Hesitations

In certain instances, FHA loans can have major disadvantages. The truth is that many sellers want to know everything about a potential buyer, and realtors are usually more than happy to share the information. When the seller finds out you want to use an FHA loan, they may fear that the additional requirements will slow the process down or even kill the deal. This is especially true in a hot market, so it may be best to opt for another type of financing in this case.

Questions to Determine if an FHA Loan is Right for You

Taking on a mortgage loan is a significant responsibility that you should not take lightly. Regardless of whether you choose an FHA home loan or a conventional mortgage, you need to be entirely sure that you're ready to commit to paying the mortgage payment each month.

And even when you know you can make the monthly payments, you must take the time to choose the perfect mortgage loan for your needs. That being said, let's look at the questions you should ask yourself to determine if an FHA home loan is right for you.

• What is your FICO credit score? It must be at least 500 with a 10% down payment or at least 580 with a 3.5 percent down payment.
• Do you have verifiable income that spans at least the past two years?
• Have you prepared bank statements, federal tax returns, and pay stubs to verify your income?
• Are you purchasing a primary residence?
• Will an FHA-approved appraiser appraise the property?
• Is the property move-in ready? FHA loans do not cover fixer-uppers or other bargain homes that need a lot of work.
• What are your front-end and back-end debt ratios? Knowing your debt-to-income ratio is vital because, to secure an FHA loan, it must be between 30 percent and 43 percent, depending on the FHA loan type.
• Have you filed for bankruptcy? If so, you should wait one to two years to apply for an FHA home loan.
• Do you have a foreclosure? Be sure to wait at least three years before applying for an FHA loan.

Ultimately, knowing the answers to these questions will tell you if an FHA home loan is right for you. If you answered "yes" to all of these questions, you might be able to qualify for a conventional loan.

Now that you understand FHA loans, it's time to use the payment calculator to see if you're ready for homeownership.