How much house can I afford with an FHA loan?
How our mortgage affordability calculator works
We have done a lot of work to make our calculator as simple as possible to use, but that doesn’t mean it’s not powerful! We’ve collected data for over 50,000+ zip codes and consider more than 15 data points to give you as accurate an estimate of home loan affordability as we can. Below we describe in more detail how we determine your affordability. If you have any questions please don’t hesitate to contact us, we love hearing from our readers!
We take a look at the PITI payment – the total principal and interest payment for the mortgage, the monthly cost of taxes and insurance for the home, any homeowners association dues for the property, and any mortgage insurance that is required for the loan.
Once we’ve calculated your estimated monthly payment, we compare that amount to your monthly income to determine your debt-to-income ratio. This is the same process a mortgage underwriter will use to understand if you can afford your payment and approve your loan. For FHA loans, you can qualify up to a 50% debt-to-income ratio if your credit score is great than 580 and if you meet two of the following criteria:
- Your mortgage payment is not a significant increase relative to your existing housing expenses
- You have cash reserves after paying closing costs
- You have some residual income
- You have significant income that’s not included in the standard income calculation during underwriting
However, a good rule of thumb is to target a debt-to-income ratio of 36% to ensure your new house payment will be manageable.
Estimating mortgage insurance
Mortgage insurance is required for any home purchase with less than a 20% down payment. Mortgage insurance can come in two forms – it can be paid up front in cash or included in the monthly payment.
To estimate the cost of mortgage insurance for FHA loans we include an upfront mortgage insurance premium of 175 basis points based on HUD’s guidelines. We remove this upfront amount from the estimated down payment before calculating the mortgage affordability. For annual insurance premiums, we use an estimate of 70 basis points. The HUD guidelines in Appendix 1 range of 45 to 105 basis points based on loan term and the loan to value ratio for the home.
Estimating property tax and homeowners insurance
To understand the home loan you can afford based on your monthly salary, we assume that property taxes and homeowners insurance will be paid monthly. We use the average cost of property tax by state based on the work done by WalletHub to estimate the monthly property taxes for your new home. This is only an estimate based on historical data, in most states the assessed value of the home will be set at purchase, so the actual property taxes you will pay for your new home will likely be different. This estimate does not include local taxes or special assessments like Mello Roos taxes.
We use the average cost of homeowners insurance by state based on the great work done by ValuePenguin to estimate the cost of insuring your home. The actual cost of homeowners insurance could change dramatically based on the specifics of the home you buy and it’s location, especially if it’s in an area prone to natural hazards like flooding or earthquakes. However, this estimate is similar to the way a loan officer will estimate the costs of insurance when pre-qualifying you for a home.
Mortgage interest rate
A small adjustment in interest rates can lead to a major change in your monthly payment, which is why mortgage interest rates are a major factor in determining your home loan affordability. You can learn more about mortgage interest rates here. We recommend you see what interest rate you qualify for with LendingTree and then use that rate with our calculator.
Our calculator does not currently take credit scores as a direct input. The minimum credit score for an FHA loan is 580, which is lower than the minimum credit score for a conventional loan. This often makes FHA loans a viable option for home buyers with credit scores on the lower end of the spectrum or with thin credit files.
However, you can check your score and use that to check your interest rate with LendingTree. Providing an accurate estimate of interest rate will help us more accurately estimate your mortgage affordability.
Cash to close
To estimate the cost of mortgage insurance for FHA loans we include an upfront mortgage insurance premium of 175 basis points based on HUD’s guidelines. We remove this upfront amount from the estimated down payment before calculating the mortgage affordability.
Outside of upfront mortgage insurance, we assume that the fees associated with the loan will be paid in cash at the time of closing, either by the buyer or the seller. Learn more about what’s included in the cash to close amount.
Loan product and amortization term
To estimate your maximum mortgage affordability we assume you will choose a 30-year loan.
We look up the county loan limits for FHA loans based on the zip code entered in the calculator and use that to determine mortgage affordability. We use the 2019 FHA lending limits directly from the HUD database based on the number of units in the property you wish to buy.