FHA loan income limits: Are there any?

Does FHA have income limits?

FHA loan income limits should not worry any borrower.

Unlike some mortgage programs, the FHA mortgage program has no income ceiling. If you want an FHA-backed mortgage and you’re named in the wills of the rich and famous that’s okay, you’re welcome to apply.

But the idea of FHA loan income limits does raise a question: What kind of money to do you need to get FHA financing? The real issue is not can you be disqualified by having too much income – a problem not many of us face – but how the income you have can go further when buying a home.

FHA loan income limits & affordability

One of the most serious issues in real estate concerns is the matter of affordability. The fact is that property values are generally rising faster than incomes. That’s good news for real estate owners but a considerable concern for those looking to buy a home.

Here’s what we know.

• Where you live impacts affordability. A study by ATTOM Date Solutions found that in the first quarter median home prices were not affordable for average wage earners in 335 of 473 U.S. counties analyzed in the report (71%).
• Home values have generally been rising. According to the National Association of Realtors (NAR), median buyers typically paid $249,500 for a home in February 2019. That’s the 84th straight month of year-over-year gains.
• While home prices have generally been rising they have not been rising universally. Another NAR study shows that single-family home prices increased in 163 out of 178 metropolitan statistical areas in the fourth quarter (92%). That also means home values were steady or actually fell in 15 metro areas. And, as we know from the great recession of 2006 - 2008, no one can promise that home values will increase tomorrow or at all.
• While home prices have generally been rising incomes have not. “There has been little or no real income growth for most people for decades,” says billionaire Ray Dalio. He explains that “prime-age workers in the bottom 60% have had no real (i.e., inflation-adjusted) income growth since 1980.”

The FHA mortgage program – a program created by the federal government in 1934 – is likely the best option for borrowers with affordability concerns. The evidence? Almost 83% of all FHA purchase mortgages were originated for first-time borrowers.

How FHA financing increases affordability

While there may not be FHA loan income limits there is a sense of proportionality. You can generally get an FHA mortgage with the income you have but you can’t borrow more than you should.

How does the FHA mortgage program do this?

In basic terms the FHA has a series of tests for potential borrowers. The tests are fairly straight-forward and allow you to see how much financing might be available to you.

Mortgage insurance premiums

Interest rates are the big issue with any form of mortgage financing, this is why it pays to shop around. The reason you can borrow with 3.5% down and not the usual 20% lenders really want is that the FHA program is really a form of mortgage insurance. If you don’t pay your mortgage FHA insurance will protect lenders against any losses.

Where there’s insurance there are also premiums. In the case of FHA mortgages there are two forms of mortgage insurance.

First, there is a 1.75% up-front mortgage insurance premium (the up-front MIP). This is money which must be paid at closing, however borrowers can “pay” by adding the up-front MIP amount to the mortgage debt. This will make the loan a little larger and also increase the monthly mortgage payment.

Second, there is an annual mortgage insurance premium (annual MIP). For most FHA borrowers this charge will be equal to .85% of the outstanding loan amount.

Insurance premiums are a cost and borrowers naturally prefer fewer expenses. However, the FHA premiums allow borrowers to purchase real estate with just 3.5% down, a much better option in many cases than waiting years to accumulate a 20% down payment.

Credit scores

You can get an FHA loan with a credit score of just 500 – at least in theory. In the real world, few lenders will consider such a mortgage application. The typical FHA borrower has a 670 credit score and both the FHA and most lenders will be elated if your score is higher still. While there are no FHA loan income limits there is a very great interest in credit scores.

Whether you are mortgage shopping or not, it makes sense to check your credit report to see if it has out-dated information or factual errors, things which can lower credit scores. You can get a free copy of your credit report once every 12 months from each of the three major credit reporting agencies – TransUnion, Experian and Equifax – by going to AnnualCreditReport.com.

Loan-to-value ratio (LTV)

A huge FHA affordability advantage is that little money is required up-front. If your credit score is 580 or above you can finance with an FHA mortgage that requires just 3.5% down. This is a far more attainable savings goal than loan programs which require 5%, 10% or 20% up-front. In addition to the down payment, you will also need money for closing costs, moving, etc.

Debt-to-income ratio (DTI)

The FHA has liberal DTI requirements. The DTI shows how much of your gross monthly income (your income before taxes) goes to required debt payments.

With the FHA program the “front” ratio can be as high as 31%. The front ratio is a measure of housing costs, such things as mortgage principal, mortgage interest, property taxes and property insurance (PITI).

The FHA also considers your “back” ratio. The back ratio includes housing costs as well as required monthly payments for such costs as student loans, auto financing and credit card repayments.

As a borrower you have to be very careful with FHA DTI requirements. If you have strong credit scores, good cash reserves, or a lot of money remaining at the end of the month (residual income) then FHA rules allow for higher DTI ratios. For instance, more than a quarter of all FHA borrowers have DTI ratios of 50% or more according to recent studies.

High DTI ratios may sound great but they have a substantial and worrisome drawback. If required monthly payments are sufficiently high you won’t have much money left for everyday expenses. You’ll be house poor and that can be very uncomfortable.

The FHA is cracking down on borrowers with high DTIs and low credit scores. You can stand out by raising your credit score with full and timely payments and by growing cash reserves.

Can you qualify for FHA?

Many would-be home buyers would qualify for FHA, but assume they can’t.

FHA is more lenient than you might think regarding DTI, credit scores, and income.