I've been working on finding an FHA approved condo for a client of mine and it's taken a little longer than expected because there are several moving pieces to the deal. Usually when you look for a home and are preapproved for a mortgage, you know exactly how much home you can afford. If you can afford (and are preapproved for) $150,000, you would look at condos at or under that price.
However, when your lender thinks about how much home you can afford they think differently, and they look at your total monthly housing expenses relative to your income. For a condo, monthly housing expenses would include maintenance fees, taxes, as well as your mortgage payment. For each property, maintenance fees and taxes are fixed, what the lender figures out is how much of a monthly mortgage payment you can make. From the mortgage payment, the lender is able to calculate the mortgage amount, and when added to your down payment produces how much house you can afford. What you need to keep in mind is that the more your maintenance fees and/or taxes are, the less house you can afford.
When your lender's loan officer decides to issue a preapproval letter for your FHA loan, they look at two ratios:
- Mortgage Payment Expense to Effective Income (Maximum: 29%)
- Total mortgage payment (principal and interest, escrow deposits for taxes, mortgage insurance premium, homeowners' dues, etc.) divided by your gross monthly income.
- Total Fixed Payment to Effective Income (Maximum: 41%)
- Total mortgage payment and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.) divided by the gross monthly income.
For an FHA loan, these two ratios are higher than a conventional loan that has ratios of 28% and 36%. However, these ratios are not set in stone, and you may qualify to exceed them if you have: (1) A large down payment; (2) A demonstrated ability to pay more towards your housing expenses; (3) Substantial cash reserves; (4) Net worth enough to repay the mortgage regardless of income; (5) Evidence of acceptable credit history or limited credit use; (6) Less-than-maximum mortgage terms; (7) Funds provided by an organization; and/or (8) A decrease in monthly housing expenses.
The big impediment to alot of these FHA deals right now are property taxes. When your lender calculates your payment ratios, they use the previous year's taxes for their calculations, for this year they are using taxes paid in 2008. However, in a property market where prices have been rapidly declining, this vastly overstates the owner's tax liability as 2008 taxes are based on an appraised value that was calculated at the beginning of 2008. Also, the lender does not take into account whether you plan to apply for the homestead exemption, which would lower your taxes. With all that said, its likely that your 2009 taxes paid will be lower than the amount escrowed by your lender.
Tags: fha loan, maintenance fees, mortgage, mortgage amount, taxes
