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Special Alert! The Worst Mistake To Determining FHA Maximum Loan

By Kate Ford

Republish: EasyPublish™ Published: 22Sep2008 Word count: 628 Viewed: 479 time(s) Get Free Content For Your Site

In this short article I am going to show you how an FHA lender decides what is the maximum loan amount you can afford.

FHA mortgage loans are taking off according to National Mortgage News Online. There is a trend developing here and there's a good reason why.

FHA, the Federal Housing Administration, doesn't make loans directly but it insures its approved lenders against loss. An approved FHA lender is any mortgage originator that has qualified with the Federal Housing Administration and met their standards.

An FHA insured loan insures the lender in case the borrower defaults on his payments. However it does not insure the borrower, a common misunderstanding. But it does allow for lenders to offer mortgage products with low down payments that a lending institution might not otherwise offer.

If you are wondering how a lender decides what is the maximum mortgage you are allowed to borrow, it takes into account several factors.

The debt-to-income ratio is the first and foremost issue to determine affordability for the maximum loan amount on an FHA mortgage loan. It is a simple calculation that compares your gross income before taxes to your housing expense. Your housing expense is a combination of your prospective monthly payment of principal, interest, taxes and insurance. FHA wants this ratio to be 31% or less.

In other words, it is preferable if your monthly housing expense does not exceed 31% of your income.

There is also a second debt-to-income ratio that accounts for your monthly housing expense plus other non-housing expenses such as monthly payments from credit card debt, installment debt, car payments, student loans, alimony, and child support. It is calculated by adding the monthly housing payment (principal, interest, taxes, insurance) plus monthly payments from non-housing expenses to arrive at a total debt. Then simply divide the gross monthly income by the total debt. FHA prefers that this ratio not exceed 43%. That means that FHA likes to see monthly housing debt plus non-housing debt be less than 43% of your total gross monthly income.

Other considerations come into play such as cash for down payment. Money available for closing costs is also important and of course the all important credit history.

It may seem overwhelming when you read everything that goes into determining your maximum loan amount but you shouldn't let that discourage you. In fact, the worst thing you can probably do is try to determine your maximum loan amount on your own.

Here is the most important thing you should do to determine your maximum loan amount whether you are refinancing or buying a home. Instead of trying to calculate your ability to borrow, look for a lender that can trust.

Start by asking your friends about lenders that they have used in the past and I don't mean just lending institutions. I mean specific people such as loan officers and mortgage brokers. Finding a loan representative that can guide you through the process of financing your home can be a true god-send.

Second, ask people in the real estate business such as escrow officers, insurance agents, real estate agents, and appraisers who they would use if they were going to finance their own home. Most likely certain names will come up over and over.

Finally, take advantage of the internet to search for lenders in your specific area. For example, you could search for mortgage lenders and then add your city or locality to the search. See who comes up. You might be surprised. Lenders' main source of advertising now days is the internet.

Most important is to feel comfortable with whomever you pick. As I often say, it is your mortgage, no one cares about it more than you.

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