Do I make too much money to qualify for an FHA mortgage loan? Is there a maximum income “ceiling” associated with this program?
These are common questions among home buyers who are considering the Federal Housing Administration mortgage program. Today, we will answer these questions in detail.
In short: There is no income ceiling or maximum associated with the FHA mortgage insurance program. So in that regard, no, you cannot make too much money to qualify for an FHA loan. Nor is there a minimum income requirement for this particular program.
The most important thing is that borrowers earn enough money to manage their monthly housing payments, along with all other recurring debts. That is the most important income-related requirement for an FHA loan.
You Cannot Make Too Much Money for an FHA Loan
The FHA loan program was originally designed to help borrowers with low to moderate income qualify for a mortgage loan. This program dates back to the 1930s, and was created in response to the Great Depression. It was designed to help creditworthy borrowers overcome some of the initial hurdles to homeownership, such as the down payment.
The FHA loan program allows borrowers make a down payment as low as 3.5% of the purchase price. As a result, this program appeals to borrowers with limited funds in the bank. Additionally, this program is fairly “forgiving” of past credit issues and other problems that might disqualify someone from getting a regular mortgage.
But despite its “moderate income” focus, the FHA loan program does not have a maximum income limit or ceiling for borrowers. In other words, you cannot make too much money to qualify for an FHA loan. You won’t be turned down for having too high an income.
The Federal Housing Administration is managed by the Department of Housing and Urban Development, or HUD. So it is HUD that sets all of the guidelines and requirements for this program.
Most of those requirements can be found within HUD handbook 4000.1, also known as the Single-Family Housing Policy Handbook. And while there are a lot of income-related rules and requirements within that handbook, it does not say that a person can make too much money to qualify for an FHA loan. Nor does it establish a maximum income limit or ceiling.
Loan Limits for Your County
That being said, there are limits to the amount of money you can borrow when using the FHA mortgage program. These “loan limits” vary by county because they are based on median home prices.
But if you take a look at the current FHA loan limits for 2021, you’ll see that the program can support some pretty big mortgage amounts.
For example, the maximum FHA loan size for expensive real estate markets like San Francisco and Washington, D.C. is currently set at $822,375. A person who can manage the monthly payments on a loan of that size is clearly not a low- to moderate-income borrower.
And that illustrates the key point of this article. As far as the official guidelines are concerned, you cannot make too much money to qualify for an FHA loan.
Understanding The DTI Ratio
While HUD does not set a maximum income limit or ceiling, they do have certain guidelines relating to the borrower’s debt-to-income ratio, or DTI.
As the name suggests, a debt-to-income ratio is basically a numerical comparison between the amount of money you earn and the amount you spend on your various debts.
You have both a front-end and a back-end DTI ratio. The front end only looks at your housing-related expenses. The back end (which is the one lenders care about the most) takes all of your recurring debts into account – including the mortgage payment.
Generally speaking, home buyers who wish to use an FHA loan are limited to a back-end or total debt-to-income ratio of 50%. There’s a bit of wiggle room here, in terms of compensating factors and allowances. But the bottom line is that if your combined recurring debts use up more than half of your income, you might not qualify for an FHA loan.
The Mortgage Insurance Consideration
To recap, there is no income limit or ceiling for the FHA loan program. So, technically speaking, you cannot make too much money to qualify for an FHA-insured mortgage.
Mortgage insurance is another important consideration that ties into this. Nearly every borrower who uses this program to buy a house has to pay mortgage insurance. There are actually two premiums – upfront and annual. Both can be “rolled” into the loan paid off over time.
The upfront mortgage insurance premium is typically set at 1.75% of the base loan amount. The annual premium is currently set at 0.85%, assuming a 30-year mortgage with 3.5% down.
When researching the different mortgage options that are available, you have to consider the total cost of the loan — including any insurance that might be needed.
Summary of Key Points
We’ve covered a lot of information in this tutorial, because we know it’s a popular topic among home buyers and mortgage shoppers. Let’s take a moment to recap some of the most important points covered above.
- Like many of HUD’s programs, FHA loans were originally intended for borrowers with low to moderate income.
- But there are no specific income requirements associated with this program, either minimum or maximum.
- As far as the official rules and requirements go, you cannot make too much money to qualify for an FHA loan.
- In fact, the Federal Housing Administration will insure some pretty big mortgage loans (upwards of $800,000, as of 2021).
- But there are some debt-to-income ratio limits and requirements associated with this program. Generally speaking, borrower should have a back-end debt ratio no higher than 43% (or 50% with compensating factors).
- Borrowers should also consider the total cost of the loan, including any mortgage insurance that might be required. Compare the cost of an FHA versus a conventional loan, to see which one makes sense in your situation.
Disclaimer: This article is intended for a general audience. Every mortgage lending scenario is different, because every borrower is different. As a result, portions of this article might not apply to your situation. The best way to find out if your income situation is compatible with the FHA loan program is to speak to a HUD-approved mortgage lender.