This blog entry is part of an ongoing series in which we answer common questions about the FHA mortgage insurance program. Today’s question is, are FHA loans only for low-income borrowers?
The short answer is no. There are no income guidelines or restrictions that prevent borrowers with moderate to upper income from using the FHA program to buy a house. These loans are not reserved for low-income borrowers.
With that being said, this program is popular among home buyers with low to moderate income, partly due to the fact that it offers a relatively low down payment of 3.5%.
FHA Loans Are Not Just for Low-Income Borrowers
It’s a common misconception that FHA home loans are only for low-income borrowers. This might stem from the fact that these loans are insured by the Federal Housing Administration, and managed by the Department of Housing and Urban Development. This government management leads some people to believe that FHA loans are reserved for borrowers with low income. But that is not the case at all.
In fact, anyone who meets the basic qualification requirements for this program can apply for an FHA loan, regardless of the person’s income level.
While there are no rules that specifically limit FHA-insured mortgage loans to low-income borrowers, the program has long been popular among this particular audience. Most people who use FHA loans to buy a house fall into the low or moderate income brackets.
There are three reasons for this:
- Loan limits. There are limits to how much you can borrow when using a Federal Housing Administration loan. These limits vary by county because they are based on median home prices. So by design, they are intended to help eligible borrowers purchase a home that is near the median price — or below that level. In other words, these loans are generally not geared toward upper-income borrowers purchasing high-end homes. This is one reason why most people who use FHA loans have low to moderate income.
- Down payment. This mortgage option allows for a down payment as low as 3.5%. And this too makes it appealing to low- and moderate-income home buyers. But this relatively low investment requirement also comes with the added cost of mortgage insurance (see below).
- Mortgage insurance. Borrowers who use FHA loans to buy a house usually have to pay mortgage insurance premiums, and it could stay with you for a long time. This insurance protects lenders from financial losses that result from borrower default, or failure to repay. Upper-income borrowers tend to avoid the FHA program for this very reason. Many of them can afford to make down payments of 20% or more, which eliminates the need for mortgage insurance.
To recap, FHA loans are not only for low-income borrowers. Anyone who meets the basic eligibility requirements for this program can apply for a loan. But for the reasons stated above, most of the people who use FHA loans do fall into the low to moderate income brackets. The program was designed with such borrowers in mind.
Your Ability to Repay Is What Matters Most
While you don’t have to be a low-income borrower to use an FHA loan, you will need to have sufficient income to repay your debt. To measure this, mortgage lenders use something known as the debt-to-income ratio, or DTI.
As you might have guessed, this ratio compares the amount of money you earn each month to the amount you spend on your recurring monthly debts — including the mortgage payment.
Current HUD guidelines state that most borrowers who use the FHA program should have a total debt-to-income ratio no higher than 43%. But they also give mortgage lenders some leeway in this area, by allowing for “compensating factors.” So the 43% DTI ratio is not a “hard” limit.
In fact, borrowers with debt ratios as high as 50% can qualify for the program, if the lender can document compensating factors such as cash reserves, an above-average credit score, or a “minimal increase in housing payments.”
Disclaimers: This article answers the question, are FHA loans only for borrowers with low income? While we make every effort to ensure the accuracy of the content published on our website, we are not an official source for FHA-related information. The program is managed by the Department of Housing and Urban Development. So if you would like to learn more about this subject, you may refer to the HUD website or speak to an FHA-approved mortgage lender.