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You make X a year. You want to find out how much home you can buy at maximum. Let me show you how to do that when you are okay with getting an FHA loan.

How’s it going everybody this is beat the bush today i’m going to show you how much home you can afford using an fha loan fha stands for federal housing administration it’s a federal program that lowers the bar a bit for mortgages so that more people would qualify for mortgages now a lot of people cannot afford a 20% down payment even on a $250,000 house that

Amounts to $50,000 in cash that you have to have if you don’t have that kind of downpayment and fha loan could be a way for you to obtain a home another thing that can keep you from getting a regular mortgage is if you have a really low credit score but not too low you can go down to about 500 but then if you go down to that much you’ll have other requirements

If you have a bankruptcy or got foreclosed upon there’s other requirements that you have to meet in order to get an fha loan if you don’t have 20% down in a regular mortgage you have to pay a thing called pmi which is private mortgage insurance it ensures the lender on the portion of the 20% that you cannot pay now getting a pmi requires its own approval process

And if you cannot get that that means you might have to fall back to getting an fha loan like right here so this fha program is great and all it lowers the requirements of a typical mortgage but you got to understand it just doesn’t lower and it you get it for free it does not come for free you’re paying for the privilege of having lower requirements so due to all

The insurance payments you’re paying to the fha you’re actually paying more for the same exact home compared to a person with a better credit score that is getting it through a regular mortgage so check out this really long list of requirements in order to get approved for an fha loan it’s understandable why the fha puts these kind of requirements in in order to

Get approved for a loan because they are to insure for you they are insuring against you from defaulting on the loan if you ever default and you cannot pay back they will be responsible for that portion of the loan so let’s go through these requirements and let me just say that these requirements are not completely set in stone usually if you have some reason for

Something they would actually let it pass for example steady employment for two years if you have some other reason why or you can prove that it’s you know your is actually really steady without going through two years and you know they might let that pass you need a social security number you need to be in the united states lawfully you need to be of legal age

Now this 3.5% down minimum depends on your credit score if you have 580 credit score and above you can go all the way down to 3.5% however if you have a really really terrible credit score of all the way down to 500 then you are required to put in 10% not to mention that the percent down you put in affects greatly the insurance that you have to pay and i’ll go over

That later you can only use the fha loan for primary residence which means you got to live in it if you get approved for an fha loan you need the property to be approved by an fha approver so this approver needs to be from their organization the front end ratio which is just a percentage of your income it’s just how much you can take in order to pay for the house

For the mortgage for the hoa fee property tax mortgage insurance homeowner insurance all of this you can go all the way up to 31 percent but they would allow you to go all the way up to 40 percent now this is in contrast to a regular mortgage you can see in a regular mortgage they kind of want you to stay at a 28% this extra 3% here on top of the 28% actually helps

You make the mortgage a bit affordable because they let you stretch your budget a little bit more but there’s the case of stretching your budget more because you’re using more of your paycheck to pay for this fha loan thing the back end ratio is how much you pay for mortgage and all your debt including credit card debt your car payments your student loan everything

Added up so let’s say you add up all of these debts you have it cannot exceed 43 percent of your income and if you happen to went into bankruptcy you need to be two years out of bankruptcy before you can qualify for this loan you need to be three years out of foreclosure so if your previous home somehow you got foreclosed upon got kicked out and gotta go rent or

Something then you have to wait three years after this foreclosure event before you can apply for a fha loan and get a new lastly the property must meet minimum standards okay they have a set of standards you can’t go by like a little hut and then you can get a loan on it they want to be able to sell this thing if you ever default so it becomes a lot easier for

Them to liquidate things it’s kind of like protection on their end they want things to look good and that the property is actually worth something and if it doesn’t meet the standards they want the seller to fix it before they’ll approve the loan and if the seller is refusing to fix it you have to put extra money in into an escrow account which means the escrow

Account is you put it with a third party they hold the money and they make sure you get this thing fixed and then they will release that money to the people who fixed it this is just to make sure that you are absolutely going to fix this whatever problem they found and that the mortgage loan they give you is sound quite a bit of requirements here and i’d say this

Is pretty complex but from here on i’m just going to try to make it simpler in terms of how you can calculate how much you can afford so you might wonder what this fha thing is going to cost you well to start off with right when you get the loan you have to pay a lump sum okay it’s called an upfront mortgage insurance premium and it comes in at 1.75 percent of

Your mortgage so if you pay for a $250,000 house if that is your mortgage amount after the downpayment and stuff then you have to pay four thousand three hundred seventy five dollars this amount is give it to them it’s paid and you don’t get it back okay it’s not paid into the mortgage or anything this is this is a fee you can pay instantly if you have that kind

Of money laying around to put on top of whatever downpayment that you pay three point five percent ten percent or whatever or you probably don’t have that kind of money because you’re trying to go for a low downpayment so you’re going to roll this into the mortgage so what this means is that you can afford a little bit less okay so it’s going to be you know four

Thousand dollars less than what you could normally have afford with your income on top of paying a lump sum you also have to pay for a monthly fee now this is on top of the interest rate that you’re paying on your mortgage here’s a breakdown of the fees that you have to pay in percentage so you can see that if you add one percent interest rate to your mortgage of

Say four percent when you go from 4 percent to 5 percent it’s a big deal it goes something like this roughly 1.0 5% here and it gets lower and lower okay over here is the term years 15 years if you’re more than 15 year term you go up here for 625 k loan if you’re more than that okay you go up here loans it’s 95% loan-to-value ratio if you’re more than that then

You have to pay 1.05 what does loan-to-value mean it means how much loan that you have to take compared to the value so if you put in 5% down payment you’re going to have 95 percent loan to value and if you only put in 3.5% down payment you’re going to have a 96.5 loan-to-value ratio which means you’re going to go more so you have to pay a 1.05 interest rate on

Top of the interest rate on your mortgage let’s say you’re buying a $500,000 house 30-year mortgage and you’re putting a 10% down so 15 years 30 years is more over here $500,000 house which is less than 625 so you go this way loan-to-value is 90% so it’s less than 95 so you go this way so your api will be 0.8% these mortgage insurance premiums are set by the fha

If you have a 30-year loan you might be wondering do you have to pay this point 8 percent for the entire duration of the 30-year loan because if you do that’s quite significant well it depends on your loan to value ratio your initial loan to about value ratio because your home could appreciate right and then you can go hey look my loan to value changed it’s a lot

Better now because it increased twice and now your loan to value is 50 percent so do you have still have to pay the answer is yes you still have to pay that insurance premium even though your home appreciated in value let’s say you pay anything less than 10 percent down payment okay because you’re in this situation where you don’t have that much down payment you

Put in less than 10% and you would go okay it’s more than 90% loan to value ratio which means you have to pay the full term so it’s 30 years all 30 years you have to pay that mortgage insurance premium however if you can make it to 10% which means you can go here then you only need to pay the mortgage in premium for only 11 years which is a lot better 11 years is

A lot better than 30 years so you really make sense to save more on a down payment because the tearing here shows that the more down payment you have the less you are as a risk to them then that means the less money you have to pay right here it’s very evident as soon as you go over to them 10% you’re going to pay a lot less in insurance premiums of course even if

You pay more than 10% down payment you still got to pay this initial fee here i realized that not everyone is going to make the $50,000 us median household income but the final numbers are scalable and i’ll show you that over here at the end taking $50,000 income a year you multiply this by 28% for the regular mortgage right not the fha time get $14,000 divided

By 12 means every single month you can afford one thousand one hundred sixty six dollars but under fha guidelines you can go up to 31 percent comfortably 31 percent of $50,000 is fifteen thousand five hundred dollars divided by twelve you means every single month you can pay one thousand two hundred ninety one dollars now i want to compare to a regular loan here to

Show you how much more is actually costing you per month to get an fha loan for the same exact mortgage now if you have a credit score of seven hundred and above at four percent interest rate which is the regular nowadays for 2016 30 year fixed mortgage loan on a two hundred fifty thousand dollar house it will cost you one thousand one hundred ninety-four dollars

A month which is very similar to how much you can afford you can think of it as fifty thousand dollars times five which is two hundred fifty k that’s how much home you can afford under the regular loan program the regular mortgage where you save up 20% for a mortgage however let’s say you have a credit score of 580 n above you have to pay the special insurance

Premium here the lump sum and also a monthly fee of 0.8% here so let’s say your interest rate is 4% so you got to go 4.8% add it together on a 30-year mortgage so for a 250k mortgage it’s going to cost you one thousand three hundred twelve dollars a month you see how when fha relaxed this twenty eight percent to thirty one increases the amount of money that you can

Spend on your mortgage to 1291 this kind of goes hand-in-hand with the amount that you have to pay under this new higher interest rate thing so your increase here is actually kind of compensates for the insurance premiums you can think of this as yes you make the same amount of money but they’re going to take off a little bit more you can save a little bit less

In order to pay for the premium which really means you’re kind of using your budget more you don’t have as much free cash flying around you can’t use it to save up things like that lastly let’s say you don’t have a fifty thousand dollar income you have something different okay anything different let’s say you make some other amount than 50k which is very likely

Then you just calculate thirty one percent of that and divide it by twelve to figure out what your monthly payment is okay that you can afford to pay this comes out to be 1033 for the case of a person earning $40,000 a year then you just take the number i did for this one divide it by one thousand three hundred twelve times two hundred fifty k equals 196 k so this

Guy making forty thousand dollars can afford a home of 196 k assuming they’re getting a thirty-year interest and assuming they’re they fit in this bracket where it’s about point eight percent interest you can see here that if you make less yes you’re going to be able to afford a smaller home however if you are the same person okay you make the same amount and you

Either get a regular mortgage or an fha mortgage it’s going to be very similar other than the fact you have to pay more you can get approved for roughly the same size house provided you can pay the initial lump sum of the fha payment and the monthly insurance premium here is actually compensated by them relaxing this ratio that you can use from your income i hope

That wasn’t too complicated i hope you can use this to figure out how much home you can actually afford don’t forget to give me a like over here comment down below let me know if this helps you and don’t forget to subscribe over here thanks for watching

Transcribed from video

How Much Home Can You Afford with an FHA Loan | BeatTheBush By BeatTheBush