The FHA Purchase Loan: Maybe you can afford to buy

When I talk to friends and family who rent the question that I always ask is whether or not they have thought about buying a home. Answers vary, some people don't want to be tied to the same place, or deal with the extra responsibility that comes with owning. Most though, have not considered buying because they assume that they can not afford the down payment or they believe that the mortgage payment will be much higher than their current rent. What most don't know is that these costs may not be as high as you think. You may be able to actually save money each month by owning without coming up with much more than you would to move into a rental.

How Much Are the Monthly Payments?


Currently, home prices nationally are back to where they were in 2000. The market has adjusted due to millions of foreclosures throughout the country. Besides the home prices falling drastically, mortgage interest rates are at all time lows hovering around 4.0%. All of this means that the monthly payments on a mortgage are often times lower than they are for renters each month. Lets look at an example of how the payment is broken down on a home with a purchase price of $250,000 using an FHA 30 year fixed purchase loan with an interest rate of 4.0%:

Mortgage Payment: $1,163 / month
Mortgage Insurance: $231 / month
Property Tax: $250 / month
Hazard Insurance: $50 / month          
Total: $1,694 per month

In this example, you see that there are 4 different things that must be taken into consideration with an FHA mortgage loan. First is the actual payment which covers the interest you pay the bank and also pays down the principal balance of the loan. Next you have mortgage insurance. This is a temporary FHA fee that lasts for 5-10 years designed to protect them against you defaulting on the loan (see below for further info on mortgage insurance). The other things to consider are property taxes and hazard insurance. Here in L.A. County property taxes usually are about 1.2% of the homes value each year. An easy way to calculate this estimate is to take the purchase price and remove the last three digits. Hazard insurance protects you in case of fire, flood, theft, personal injury and other potential issues that could arise with your home. If you are purchasing a condominium you can typically substitute hazard insurance for HOA dues. Keep in mind, HOA dues are usually more expensive than hazard insurance and they can vary depending on the services and amenities that are included in the common areas of the condo you purchase. For a $250,000 condo I'd estimate $300 to be about average for HOA dues meaning the total payment estimate in this scenario rises to $1,944 per month.

So How Much Will the Down Payment and Closing Costs Be?

The FHA (Federal Housing Authority) has put the down payment within reach at 3.5% of the purchase price using their program. If you look at our example above on a purchase of $250,000 you will have  a down payment of $8,750. That is not so bad if you consider how much it costs to move into a home that you rent with first months rent, last months rent and a damage deposit you are probably looking at $5,000 - $6,000 just to move in (if payments are similar to buying). Similar to renting, your first month and sometimes even your second month will be covered by the funds that you bring in to close the deal. Other than the down payment there are some other costs to be considered. Often times it is possible to get these costs credited by the seller or the lender but they still need to be considered. First there are general closing costs like title insurance, escrow fees and loan fees. You also will need to establish and escrow account that is put in place to pay your property taxes and insurance when it comes due. The last major cost is daily interest. It is important to speak to you lender about these costs before you begin the purchase process and they should be able to create a plan to make sure that you can afford the down payment and closing costs.

As we enter tax season many people are trying to determine what to do with their returns. Maybe using your return to help purchase a new home is an option you had not previously considered....maybe you should.



*Mortgage Insurance description: Mortgage insurance is paid to the FHA through your mortgage payment until the balance of your loan is reduced to 78% of the original purchase price. One of the main benefits of an FHA loan is the small down payment (Conventional loans require 20% down) but the flip side is that you must pay this mortgage insurance. The reason is that the FHA is at greater risk of recovering the money they have loaned you should you default on the loan. Their fear is that you may stop making payments, they have to foreclose on the home and re-sell it and they are not able to recover the money they lent you.

*Annual Percentage Rate (APR) for above example is 4.972%