The FHA does not make home loans--it insures them. If a homebuyer defaults, the lender is paid from the insurance fund.

--You must be able to pay the closing costs, which normally total 2-3% of the price of the home. These costs might include homeowner's insurance, attorney's fees, fees for a title search and title insurance, Private Mortgage Insurance if you are paying less than 20% down, the loan origination fee, and a fee that goes into the FHA insurance fund.

You might also be paying 'points,' to the lender. Each point equals 1% of the cost of the home. Sometimes a seller will agree to pay your points, and sometimes points can be financed.

For an FHA loan, your monthly housing costs should not exceed 29% of your gross monthly income. Total housing costs include mortgage principal and interest, property taxes, and insurance. Those four terms are often lumped together, and referred to as PITI.

Example

Your total monthly costs, adding PITI and long term debt, should be no more than 41% of your gross monthly income. Long term debt includes such things as car loans and credit card balances.

Example

The ratios for an FHA loan are more lenient than for a typical conventional loan. For conventional home loans, PITI expense cannot usually exceed 26-28% of your gross monthly income, and total expense should be no more than 33-36%.