First thing is figuring out what you can afford. The FHA debt to income ratio is 43% (at least for those with a credit score of 620 or less). So, if your monthly income is $1020 and you pay $20 a month to credit cards, your allowed monthly payment is ($1020-$20) * .43 = $430. (A debt to income ratio for a conventional loan is 45%, but you have to have better credit with at least a 680 credit score, and the interest rate is higher.)
This $430 payment must include taxes and insurance. Taxes vary depending on the area and the value of the property. When you look at a house listing on any website it will usually tell you the annual tax and you'd divide it by 12 to get the monthly tax. There is the homeowner's insurance, which varies depending on a number of factors. Then there is a mortgage insurance in case you get an FHA loan, but not in case of many conventional loans. The mortgage insurance is 1.25% of the loan amount. The homeowner's insurance starts at about $20/mo for a small condominium, then about $60/mo for an older 2 - 3 bedroom house. So, if the taxes of the properties in the area you're interested in average around $140 a month, and you're getting a conventional loan at 4% interest, then your allowed mortgage payment is: $430 - ($60 + $140) = $230. How much of a house does $230/month buy? $230 / .04(4%) X 12 = $69,000. Suppose you are planning on using an FHA loan, and your FHA interest rate is 3.5%, $230 / .04 X 12 = $78,857. But that is not the house you can afford, because there would be a mortgage insurance of $82 a month. So add that 1.25% in your calculation: $230/(.035+.0125) X 12 = $58,105. Now your monthly mortgage on 58,105 * .035(3.5%) / 12 = $169 and $169 + $58,105*.0125 = $229
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