We receive a lot of questions from readers that fall into the “how much” category. Some of the most frequently asked questions in this area include:
- How much house can I afford with an FHA loan?
- How much of a mortgage loan can I qualify for?
- How much money do you have to make to qualify for an FHA loan?
All of these questions are addressed below. We’ll start by looking at the official guidelines issued by HUD. Then we’ll look at how mortgage lenders use those guidelines (among other factors) to determine how much of an FHA loan you might qualify for, based on your income.
Short answer: The general rule for FHA loans is 43% debt-to-income ratio. This means your combined debts should use no more than 43% of your gross monthly income — after taking on the loan. But there are exceptions. If you have a lot of cash in the bank, and/or other sources of income, you could get approved with a ratio up to 50%.
How Much Mortgage Do I Qualify for with FHA?
Ultimately, it’s up to the mortgage lender to decide how much of mortgage you qualify for with the FHA loan program. The official guidelines for this program come from the Department of Housing and Urban Development (HUD). But it’s the lender that determines how much of an FHA loan you can afford, based on your income.
As a starting point, the mortgage lender will look to the official guidelines contained in HUD Handbook 4000.1, also known as the Single Family Housing Policy Handbook.
Section II-A-5 of that handbook explains the “approvable ratio requirements” for borrowers. In this context, the term “ratio” refers to the debt-to-income ratio (DTI). This is simply a comparison between the amount of money you earn through your income, and the amount you spend each month on recurring debts.
The DTI ratio is one of the most important factors that determines how much you can borrow with an FHA loan — and, by extension, how much house you can afford to buy. It’s not the only factor. But it does play a big role.
Front and Back-End Debt Ratios
When it comes to FHA loans, there are two important ratios:
- Total Mortgage Payment to Effective Income Ratio (PTI): This shows how much of your monthly income will be going toward your housing costs, mainly the mortgage payment. It’s also known as the “front-end” debt ratio.
- Total Fixed Payments to Effective Income Ratio (DTI): This number shows how much of your income is used to cover all of your monthly debts — car payment, mortgage payment, credit cards, etc. It’s also known as the “back-end” debt ratio.
The general rule for FHA loan approval is 31/43. This means your mortgage payment should account for no more than 31% of your monthly income, while your total debts should use no more than 43%. This is partly how mortgage lenders determine how much of an FHA loan you can qualify for.
Example: A borrower has a gross monthly income of $6,000. In this scenario, the borrower’s total monthly debts (including the mortgage payment and other recurring expenses) should add up to no more than $2,580 per month. The math looks like this: 6,000 x .43 = 2,580. The total mortgage payment in this scenario should not exceed $1,860 per month (because 6,000 x .31 = 1,860). But in some cases, borrowers can have a total DTI as high as 50% (see below).
This is just the starting point in determining how much of an FHA loan you can afford, based on your income. But it’s not necessarily set in stone.
There are exceptions to the 31/43 rule of thumb. Quite a few of them, actually. If the mortgage lender can find and document “compensating factors” that show the borrower is a strong candidate for an FHA loan, they can allow for a higher back-end DTI ratio. Up to 50% in some cases.
Compensating factors might include:
- verified and documented cash reserves,
- minimal increase in housing payment,
- significant additional income not reflected in effective income, and/or
- residual income.
How Much House Can I Afford to Buy?
We’ve covered the first question: How much mortgage can I qualify for, through the FHA program?
But that’s only half of the picture. You also want to determine how much house you can afford to buy, when using an FHA loan. And this is something you can figure out on your own.
Believe it or not, it’s possible to get approved for a home loan that’s too big for you (or one that might become unaffordable down the road, due to changes in your financial situation). This is one of the reasons why people end up in foreclosure situations.
To avoid financial distress down the road, you’ll want to create a basic housing budget. This will help you determine how much house you can comfortably afford to buy, with an FHA loan.
“Comfortably” is the key word in that sentence. Ideally, you should be able to cover your mortgage payment each month, pay all of your other recurring debts, and still have some money left over.
How to Determine Your Housing Budget
- Start by comparing your net monthly income (or “take-home pay”) to your overall monthly expenses.
- In this context, “expenses” refers to all of the things you spend money on each month that are not housing-related. This includes gas, food, credit card bills, car payment, entertainment, savings account contributions, etc.
- Subtract your monthly non-housing expenses from your monthly take-home pay. The money left over is what you have available to put toward a mortgage payment.
- You don’t want to use this entire amount, because that would eliminate your emergency funds. But it does give you a starting point for calculating your monthly home-buying budget.
The goal is to have extra money left over each month, after paying your mortgage payment and all other monthly bills. This will help you handle any unexpected costs that might arise — a hospital visit, a car repair, etc. If you don’t account for such surprises within your budget, you won’t be able to afford them when they come along. So give yourself some financial breathing room.
This is the prudent way to figure out how much house you can afford with an FHA loan, or any other type of mortgage for that matter.
What Else Do I Need to Get Approved for an FHA loan?
Sufficient income is one of the most important things a person needs to get approved for an FHA loan. It’s also the main factor lenders use when determining how much mortgage a person can qualify for.
But there are other things you’ll need to get approved for an FHA loan.
- Down payment: The minimum required down payment for FHA borrowers is 3.5% of the purchase price or appraised value, whichever is less. So be sure to account for this when figuring out how much house you can afford.
- Credit score: According to HUD guidelines, borrowers need a credit score of 580 or higher to get approved for an FHA loan with maximum financing (and the 3.5% down payment). Lenders sometimes require higher scores.
- Manageable debt: We talked about the debt-to-income ratio above. It’s another one of the key requirements for the FHA mortgage program.
This article answers two common questions we receive from borrowers: (1) How much of an FHA loan can I qualify for with my income? (2) How much of a house can I afford to buy?
It’s important to think of these questions separately, because they are two different things. We encourage all borrowers to establish a basic housing budget, before starting the mortgage application process.
The bottom line is that the FHA does not require a minimum income for this program. That’s generally left up to the lender, as long as the debt ratios look good. Nor is there a limit on how much you can earn.
Disclaimer: This article provides a general overview of mortgage qualification factors and budgeting concepts. Every lending scenario is different, because every borrower is different. As a result, some of the concepts and guidelines mentioned above may not apply to your situation. This article is intended for a general audience and does not constitute financial advice.