As you learn about the process of federal loan approval you will find that there is a certain amount of math involved. Calculating things like down payments, debt to income ratio, maximum financing amount and interest rates may seem daunting at first. Look at all those numbers and percentages! Here we will focus purely on the FHA calculator: how to become one yourself and where to go for verification.
Terminology for the FHA Calculator
Let’s go over some helpful definitions before we get started. First, what is the down payment required? This is a percentage of your home’s contract sales price in addition to all fees and charges that may not be financed into the loan. This is calculated thus: take the appraised value of the home and add required adjustments. Multiply this number by your qualifying percentage (from 3.5-10%). If the purchase price is higher than the appraised value, you would then add the difference between the two to this number. All of this can be done with an online mortgage calculator.
The contract sales price refers to the actual cost of the home, without any closing costs. Borrower-paid closing costs are made in addition to the down payment, not included in it.
The required adjustments amount will either increase or decrease the contract sales price. They are figured in before a minimal down payment is calculated. Such adjustments include fees for gift funds that do not meet Federal Housing Administration standards, and in the event of seller-paid closing costs, financing fees over 3% or any other seller-induced fees.
If the appraised value of the home plus required adjustments is lower than the contract sales price, the appraised value will be used in another calculation: the maximum mortgage amount.
Items that are required to be paid up front and not financed into the mortgage, including insurance premiums, are then added to the down payment.
To give you an idea of what this looks like, let’s crunch some numbers in our FHA calculator. The appraised value is $135,000. Your contract sales price is $136,500, and you qualify for a down payment of 5%. We will figure $1000 to cover all upfront, non-financeable costs and we will use a financing fee of 3.5%. To find our required down payment, we take $135,000 plus a 3.5% adjustment, and get $139, 725. Five percent of this number is our down payment: $6986.25. Because our contract amount is greater than our value, we will add the difference ($1500) to this number and come up with $8486.25. Add the $1000 for additional fees, and we have our total closing cost: $9486.25.
Calculating Lending Limits
One of the many benefits of a federally-backed loan is the ability to finance several different types of expenses into the mortgage and avoid out-of-pocket costs during the approval process. A prime example is the 203k, which allows potential homeowners to include refurbishment costs with their purchase price. There are also programs that allow borrowers to finance energy improvement costs. True with all federal housing loans is that many of the closing requirements may be included in the mortgage.
There is a limit to how much you can borrow, however. These limits vary greatly from state to state and county to county, because they are based on the average price of homes in that specific zone. The type of housing you are purchasing also has an effect on how much you can spend. A particularly helpful FHA calculator may be found on HUD.gov. Here you have the option for calculating your specific limit. Using their Mortgage Limits List, I found that a single-family home in Hartford, Connecticut has a loan limit of $440,000 while the maximum for a duplex in the same area is $563,250. If you live in St. George, Utah, caps are significantly lower: $372,500 for single and $476,850 for two-family housing. The reason is that the cost of living in St. George is that much cheaper than it is in Hartford.
This is not the only way that lending limits are determined. The agency must also study a borrower’s housing expense ratios and debt to income ratios. The ceiling for the former is 31% and for the latter, 43%. To find your housing ratio, divide your new monthly mortgage payment by your gross monthly income. For debt ratio, add up all your monthly payments, including the new mortgage, and divide by monthly income. As the price on your home goes up, so does your mortgage insurance. Keep this in mind when considering your total monthly payment and ratios.
By now you may be feeling that this whole issue is rather complicated. We have gone over quite a bit of math and the criteria for determining it is varied and intricate. Not to mention there are still several other factors to consider when finding your exact mortgage amount and closing costs. Thankfully there are many resources available through a quick web search. An FHA calculator can be a major help to you in finding your specific price range and how much money you will need out of pocket to get into that beautiful new home!