June 30, 2022

A First Time FHA Home Buyer Asks “How Much Home Can I Afford?”

One of the first questions that a first time homebuyer seeking an FHA mortgage will ask is “How much home can I afford?”.

It is widely known that banks have tightened underwriting standards in order to prevent homebuyers from purchasing a home that they cannot afford and winding up in default.  Although the prospect of owning a home for the first time is certainly appealing, if the payments are not manageable, in the long term, the first time home buyer is likely to suffer financially.

A common sense approach used by many first time homebuyers is to compare their current monthly rent payment to the projected monthly payment for principal, interest, mortgage insurance, home owners insurance and property taxes (PITI).  Many potential homebuyers, perhaps spurred on by real estate agents eager to earn a commission, will compare rent to total PITI and come to the conclusion that they can easily handle the financial responsibilities of home ownership.

Before jumping to conclusions, however, a prospective first time buyer should consider two important factors related to home ownership.

  1. How much are the estimated annual costs of maintenance and repairs?
  2. How much in savings will I have left after closing for unexpected and/or emergency repairs?

Any prospective home owner who talks to a current home owner will shortly come to realize that a home, especially an older one, is often times a “money pit” with always seems to require some type of repair or maintenance.  A major problem with a heating or cooling system, roof, electrical system, structural problem or leaky basement can represent a budget killing expense for many, especially if they have no savings.

A new forced air furnace can cost between $2,000 to $4,000, a new water heater $1,000 or higher and a new air conditioning system up to $10,000.  Using a high rate credit card to pay for costly repairs will only put further pressure on a budget that may be stretched to begin with after buying a home.

Although the FHA does not normally require a buyer to have cash reserves after closing, this can represent a major risk for a new home buyer.  If one of the unexpected emergency repairs cited above is required, most home owners without savings are going to be facing a major financial problem.  In days gone by, it used to be common for a bank to require that a home owner have savings at closing of 3 to 6 months worth of mortgage payments in order to ensure that a home owner would not quickly run into financial problems if an emergency came up.  Any first time homebuyer should realistically assess the following question – Would I be able to handle an emergency situation costing $5,000 or more without putting my home and credit rating in jeopardy?

The easiest manner in which to assess the ability to handle the numerous costs of home ownership is to keep a careful budget of all income and expenses that you currently have as a renter.  If no money is being saved each month and the cost of the monthly mortgage payment is equal to or greater than the current rent payment, home ownership is very likely to be a challenging experience.

The government mortgage giant Ginnie Mae has a calculator called “Your Path To Homeownership” which tells a potential FHA borrower how much they can afford for a new home.  It is a useful tool for first time homebuyers to begin the evaluation process to determine if they are financially ready to own a home.

How Much Home Can You Afford?

Providing the information below will allow you to calculate how much you can afford to spend on a home. However, many additional factors play a part in the loan qualification process.Note: *Indicates information is required.
Income Information
Gross Income*:
(use worksheet)
$
  Include:
– Salary
– Tips
– Bonuses & Commission
Monthly Debt Information
Minimum Credit Card Payment*: $
  Other Monthly
Obligations Include:
– Child Support
– Alimony
– Student Loans
Car Payment*: $
Other Monthly Obligations*: $
Get Estimate

 

Another very useful tool for first time homebuyers is the Ginnie Mae calculator that compares the advantages of owning vs. renting a home.   The calculator takes into account how long you expect to remain in the home, the cost of your current rent, the purchase price and other important factors to assess the risk/benefits of homeownership.  (For an assessment of credit score requirements, see Why FHA Borrowers With FICO Scores Below 620 Can’t Get Approved).

Buying vs. Renting – Use the calculator below to compare the advantages and considerations of owning vs. renting a home.

Current Rent:
Purchase Price of Home:
Percentage of Down Payment:
Length of Loan Term (years):
Interest Rate:
Years You Plan to Stay in This Home:
Yearly Property Tax Rate:
Yearly Home Value Increase Rate: