How Much Home Can I Afford?

June 26, 2009
By Realter

The maximum loan amount of your mortgage depends on several factors, such as, how much you earn, how much debt you already have and the type of mortgage.

FHA mortgages are one example:

What have you heard about qualifying for an FHA-insured Loan?

* Only inexpensive homes are allowed? Not true!
* You need a lot of money for a downpayment? Not true!
* You need perfect credit? Not true!
* Your credit score has to be at least 650? Not true!
* If you ever declared bankruptcy or had a foreclosure, you’re out of luck? Not true!

Your lender will be responsible for determining if you qualify for an FHA-insured loan and will ask you for a lot of information.
FHA-insured Loan Basics

There are a few key facts about FHA mortgage insurance that you need to know.

Maximum loan amount: HUD will temporarily increase the loan limits of mortgages insured by the Federal Housing Administration (FHA) up to $729,750. This will keep credit flowing to millions of families whose options are limited by the current crisis. Previously, FHA’s loan limits in very high-cost areas were capped at $625,500. FHA’s reverse mortgage product known as the Home Equity Conversion Mortgage (HECM) will have a new national mortgage limit of $625,500, up from the previous limit of high of $417,000. These increased loan limits are applicable to all FHA-insured mortgage loans endorsed until December 31, 2009.

By law, FHA cannot insure loans that exceed certain amounts based on the metropolitan area or county in which you live. To see what the limit is in the place where you want to live, go to FHA Maximum Mortgage Limits. This site lists U.S. territories as states.

Maximum financing: Depending on the state where the property is located, the maximum FHA financing will be either 98.75% or 97.75% of the appraised value of the home or its selling price, whichever is lower.

Cash required: FHA requires that the homebuyer invest at least 3.5% of the sales price in cash for the downpayment and closing costs. If the sales price is $100,000 for example, the homebuyer must invest at least $3,500. However, the homebuyer can use gifts from family, funds from local, state or government agencies, or other sources for the downpayment. Non-FHA-insured loans may not allow this.

While only a lender can actually qualify you for a loan, you might become prequalified for an FHA-insured loan now! The first step in the process is meeting FHA’s basic eligibility requirements.
Eligibility for an FHA-insured Mortgage

Generally, to be eligible for an FHA-insured loan, you must:

* Have a valid Social Security Number (SSN),
* Be a legal resident of the United States, and
* Be of legal age to sign a mortgage in your state (there is no maximum age).

Note: An Individual Tax Identification Number (ITIN) is not an acceptable substitute for a SSN.

U.S. citizenship is not required for eligibility. When you indicate on your loan application that you hold something other than U.S. citizenship, the lender must determine your residency status from the documentation you provide. If you are a permanent resident alien, you must provide evidence of lawful permanent residency issued by the Department of Homeland Security, Bureau of Citizenship and Immigration Services (BCIS), formerly the Immigration and Naturalization Service (INS). If you are a non-permanent resident alien, you must show that you are eligible to work in the U.S. by producing an Employment Authorization Document (EAD) issued by BCIS.

The second step is meeting FHA’s qualification requirements (where your income, credit history and savings are evaluated).
Qualifying for an FHA-insured Mortgage

Your lender will decide if you qualify for a mortgage based on the “Four C’s of Credit”:

* Credit history involves what you’ve borrowed in the past, and how well you’ve paid it back.
* Capacity to repay refers to your income and your ability to handle the monthly housing payments.
* Cash to close refers to money for the downpayment and closing costs
* Collateral refers to the home you’re buying.

Remember: A lender cannot reject your loan application based on a lack of credit history or your decision not to use credit. If you do not have an established credit history, or if you do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments or other direct reports from credit providers.
Manual vs. Automated Processing

It is standard industry practice for a lender to use Automated Underwriting Systems (AUS) to evaluate loan applications. An AUS processes key information like your credit score, your monthly income, how much you want to borrow, how much cash you’ve saved, and the value of the property you want to buy. Based on this information, the AUS produces a report recommending approval or denial of your loan application.

Manual underwriting involves the evaluation of your information by a person called an underwriter in the lender’s office. The underwriter will apply his or her knowledge of FHA underwriting standards to your information, and make a decision to approve the loan or not.

Your lender may use either or both types of underwriting to process your loan, but there’s one important thing you need to know: you can’t be turned down for an FHA loan just because an AUS report doesn’t recommend approval. If the AUS report doesn’t recommend approval, it could mean that your loan has to be processed manually.

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