Before FHA's invention in 1934, lenders would deny mortgages to borrowers with less-than-stellar finances. But the FHA insures the loans, alleviating some of the risk.
When we refer to FHA loans in this article, you can assume we mean FHA 203b loans, which are used for home purchases. But the FHA also insures other loan types, including refinancing and renovation loans.
Are there FHA loan income limits?
Good news: there are no FHA loan income limits.
That doesn't mean income doesn't matter. Lenders need to make sure you can afford your monthly mortgage payments, and they'll need documentation to prove it.
Fortunately, plenty of income types count:
- W2 wages
- Freelance or gig work income
- Social Security income
- Supplemental Security Income
- Social Security Disability Insurance
A loan officer may ask you for pay stubs, tax returns, and other verification of income before your loan can move on to underwriting (a key stage in the process).
Mortgage lenders also use your income to calculate your debt-to-income ratio (DTI), which we'll talk more about in just a minute.
FHA employment requirements
When you apply for an FHA mortgage, lenders will ask for two years of employment history.
If you've been an employee of the same company for at least two years, the lender may ask to see your most recent pay stubs to verify your income.
But what if you're self-employed? You can still buy a house; you'll just need two years of personal and business tax returns to prove your income. Lenders may also require profit and loss (P&L) statements and other business documents.
Maybe your circumstances aren't straightforward. You started freelancing and don't have two years of tax returns. That's OK, as long as you have been self-employed at least a year and have two years' experience in the same line of work prior to that.
Perhaps you recently graduated college and started a new job. The good news is, your degree program may count toward your work history. As long as your income is stable and your job is secure, you can still qualify for a mortgage.
The lender's goal is to make sure you can afford your mortgage payments. The more prepared you are to demonstrate that, the better your chances of approval.
FHA loan credit score and down payment requirements
Here are a two key features to know about FHA loans:
- Minimum credit score: 580
- Minimum down payment: 3.5%
FHA guidelines actually allow borrowers with credit scores as low as 500 to qualify. However, if your score is 500-579, you'll need a 10% down payment. Not all lenders will go that low on credit score. A lender will pull your credit report when you apply for prequalification or preapproval, and they may charge you a small fee - about $30 or less - to cover that cost.
WAIT. I DON'T HAVE A CREDIT SCORE
Not to worry. FHA loans don't require borrowers to have a traditional credit score. Your lender will likely want to see history of on-time payment of rent, utilities, and other monthly costs.
If you don't have a credit history, it'll be all the more important to show that you have steady income and/or employment.
Related: FHA Loan Credit Score: Do You Qualify?
If you're unable to save up for a 3.5% down payment, FHA lets you use gift funds to cover the cost. Gifts can come from a number of sources, including:
- Friends and family
- Your employer
- Approved down payment assistance programs
Lenders need to source all of the money you use to buy your home, so you can't use cash on hand (mattress money) for a down payment. Make sure there's a paper trail for all funds, whether they are from a gift or personal savings. Gather deposit and transfer records.
You'll also need a gift letter signed by the person giving you the money stating that it was a gift and you do not have to repay it.
Who is eligible for an FHA loan?
U.S. citizens and permanent and non-permanent resident aliens are eligible for FHA loans, as well as Deferred Action for Childhood Arrivals (DACA) recipients.
Eligibility requirements to know:
- The home must be your primary residence
- You are eligible to work in the U.S.
- You have a Social Security Number
- You meet all other FHA loan requirements
Keep in mind that eligibility isn't the same as qualification. You'll still need to meet a lender's approval standards, even if you're technically eligible for an FHA loan.
Get started. Check your eligibility here.
FHA property requirements
Part of the FHA loan application process is getting an appraisal from an FHA-approved appraiser. The appraiser will ensure that the house you want meets the minimum property standards.
Once you find a home to buy, the lender takes care of hiring a qualified appraiser.
Here's what the appraiser will look for:
- Access to drinkable water and sufficient electricity
- Safe pedestrian and vehicle access to the property
- Adequate heat, hot water, living space, and sewage disposal
- At least one bathroom with a toilet and bathtub or shower
- Structural integrity of the home
Buying a condo with an FHA loan can be tricky because it must be on the FHA's approved condo list. After the housing crisis in the 2000s, most condo complexes were removed from the list and had to get re-approved. Many didn't due to the onerous process. So, it's quite likely that you won't find your condo community of choice on FHA's approved list. That being said, you can search approved condo properties on HUD's website.
FHA lenders cannot approve a loan if the property doesn't appraise for the offer price or there are major structural or quality-of-life problems. Ask your real estate agent about the state of a home before you make an offer, and find out whether the seller is willing to make the necessary updates if an appraiser finds serious problems.
FHA loan limits for 2022
The FHA publishes loan limits every year based on median housing prices throughout the country. The limits include a floor - the maximum allowed loan in low-cost areas - and a ceiling. The ceiling applies in states and counties with high-cost areas for homebuyers. Additionally, even higher limits are available in Alaska and Hawaii.
Maximum loan amounts vary significantly between the floor and ceiling, depending on where you buy. There are even dramatic differences state by state.
In 2022, a homebuyer looking for her dream house in Colorado Springs might qualify for up to $460,000. But if she moves to one of the high-cost areas near Denver, the FHA loan limit increases $684,250. And if she relocates to Aspen to rub elbows with the rich and famous? She may qualify for (and need) the maximum $970,800 to buy a single-family home.
You may be surprised at how significantly loan limits change based on location. To scope out limits in your area, check out HUD's mortgage limits search tool.
Closing cost requirements for FHA loans
All mortgages come with closing costs, though how much you'll pay depends on where you live and how much you're borrowing. The average closing costs in the U.S. totaled $3,470, excluding taxes, in 2020, according to ClosingCorp. With taxes, the average jumped to $6,087.
As a general rule, expect to pay 2-5% of your loan in closing costs - perhaps more for small loan amounts.
Where you buy can seriously impact how much money you need when it comes time to close. Homebuyers in D.C. paid steep closing costs with and without taxes, at averages of $29,329 and $6,250, last year.
Buyers in the Midwest had much more economical closings. Missourians paid an average of just $1,571, while Iowans averaged little more than $2,200 with taxes included.
Regardless of where you live, there's no getting around closing costs. Even if you get a closing cost credit from the seller or lender, in reality, you are paying for them via a higher home price or interest rate.
Here are some of the expenses you might see, based in part on estimates from the Federal Reserve:
- Loan origination fee: 0-1% of the loan
- Application fee: $300
- Appraisal fee: $500
- Home inspection fee: $300
- Pest inspection: $100
- Homeowners insurance: $300-$1,000
- Title search and insurance: $900
- Credit report fee: $30
- Attorney fee: $500-$1,000
- Survey fee: $150-400
This is not an exhaustive list of closing costs. Other fees include prepaid taxes, in addition to other inspections mandated in your area.
Whatever the closing costs associated with your loan, they should never come as a surprise. Your lender is legally required to send you closing disclosure documents three days before your closing. The disclosure documents outline all of the fees and expenses you owe. That's your opportunity to review the details and ask questions about anything that seems unfamiliar.
However, if you want to negotiate some costs, such as the origination fee or points to lower your interest rate, you'll want to do that well in advance of your closing date.
FHA mortgage insurance requirements
The FHA requires borrowers to pay a mortgage insurance premium (MIP) throughout the life of the loan if they put less than 10% down. This is a big difference from a conventional mortgage, for which private mortgage insurance (PMI) falls off when you reach 20% in home equity.
Here's how MIP works:
All FHA borrowers pay an upfront mortgage insurance premium equal to 1.75% of the loan.
This is typically wrapped into the loan amount, though you have the option to pay it in cash or using any available closing cost credits or assistance to cover it.
Most people, though, wrap it into the loan. Here's how the loan amount is affected:
- $300,000 purchase price
- 3.5% down payment ($10,500)
- $289,500 "base" loan amount
- 1.75% ($5066) upfront MIP added to the loan
- $294,566 final FHA loan amount
You'll also pay an ongoing annual mortgage insurance premium. How much you pay in MIP, and for how long, depends on your loan.
Most FHA borrowers will pay MIP as long as they have the loan. There is an exception, though: those who put down more than 10% pay MIP only for the first 11 years.
Annual MIP rates vary between 0.45-1.05%, depending on loan amount, down payment, and length of the loan.
MIP rates for a 30-year FHA loan
|Loan amount||Down payment||MIP per year||How long you'll pay|
|$625,000 or less||Less than 5%||0.85%||Life of the loan|
|$625,000 or less||5% - 9.99%||0.80%||Life of the loan|
|$625,000 or less||10% or more||0.80%||11 years|
|Greater than $625,000||Less than 5%||1.05%||Life of the loan|
|Greater than $625,000||5% - 9.99%||1%||Life of the loan|
|Greater than $625,000||10% or more||1%||11 years|
Bolded row is the most common scenario for FHA buyers
MIP rates for a 15-year FHA loan
|Loan amount||Down payment||MIP per year||How long you'll pay|
|$625,000 or less||Less than 10%||0.70%||Life of the loan|
|$625,000 or less||10% or more||0.45%||11 years|
|Greater than $625,000||Less than 10%||0.95%||Life of the loan|
|Greater than $625,000||Between 10% and 22%||0.70%||11 years|
|Greater than $625,000||22% or more||0.45%||11 years|
Rather than pay a lump sum each year, your MIP payments are broken down into 12 installments and included in your monthly mortgage payments.
- $300,000 purchase price
- 3.5% down
- $294,566 final FHA loan amount after upfront MIP
- Annual MIP of 0.85% of the loan, or about $2500 for the year
- $209 added to the monthly FHA payment
To avoid paying MIP for the life of your loan, you can refinance an FHA loan to a conventional mortgage once you have 20% equity in the property. Conventional mortgages require private mortgage insurance (PMI) on loans with less than 20% equity.
FHA debt-to-income (DTI) requirements
Debt-to-income ratio (DTI) is mortgage industry speak for how much of your gross monthly income goes toward debt payments.
There are two ways to calculate DTI:
Front-end DTI: Estimated mortgage payments, including interest, MIP, taxes, and other fees
Back-end DTI: All monthly debts, including mortgage, credit cards, student loans, car payments, and other debt accounts
FHA lenders generally want to see you at or below 45% back-end DTI. However, many lenders will issue an approval with a 50%+ DTI as long as they receive an approval from FHA's computerized system.
About a quarter of all FHA purchases in 2020 were completed with DTIs above 50%.
HOW DO I FIGURE OUT MY DTI?
Add up your monthly debts. Be sure to include credit cards, car payments, student loans, personal loans, and any other debt accounts, such as medical bills or back taxes. Do not include non-debt payments like cell phone and utility bills.
Then divide the total by your monthly income. That's your debt-to-income ratio.
Let's look at an example borrower:
|Gross monthly income||$4,000|
|Student loan payment||$500|
|Visa credit card||$35|
|American Express credit card||$70|
|Total monthly debts||$630|
If we divide her total monthly debt payments ($630) by her gross monthly income ($4,000), we find that her front-end DTI is 15%. That puts her in pretty good shape for taking out a mortgage, since her debts are relatively low compared to her income.
She could take on a mortgage of about $1,200 per month and still be around 45% total DTI.
Now let's look at a borrower on a tighter budget:
|Gross monthly income||$2,000|
|Student loan payment||$300|
|Visa credit card||$60|
|Total monthly debts||$685|
This person's total monthly debt payments aren't much higher than the first borrower's. But his income is significantly lower, and it puts his DTI at 34% before housing expenses (685 ÷ 2000 = 0.34). He'll likely face more of a challenge qualifying for a mortgage than the first borrower.
He would get approved for a mortgage of only about $200 per month at 45% DTI - probably not even enough to pay for property taxes. He is pretty far from being able to buy and would likely have to cut debt and increase his income to qualify.
From a lender perspective, it all comes back to whether you can afford your monthly payments. You can qualify for a mortgage with low income, as long as your DTI meets their criteria.
MY DTI IS ABOVE 45%. WHAT SHOULD I DO?
If you're surprised by your DTI, don't panic. Knowledge is power, especially when getting ready to buy a home. Use this information to set debt payoff goals, and brainstorm creative ways to lower your DTI quickly.
Remember, FHA is pretty lenient when it comes to DTI. About one in four FHA home purchase loans had a DTI above 50% in 20201.
Because FHA loan eligibility requirements are more flexible than those for conventional mortgages, you can likely get your DTI to a qualifying point faster.
FHA loan interest rates in 2021
Mortgage rates hit historic lows in 2020. Although they've climbed somewhat, they'll likely stay low through the end of 2021. That's as true for FHA mortgage rates as other loan programs.
Rather than focus on average rates, however, remember that what's happening in the market doesn't really reflect the rates you'll receive on an FHA - or any mortgage for that matter.
That's because lenders set your interest rate based on things like your credit score and how much money you want to borrow.
Check today's FHA loan rates. Start here.
Let's assume you have a 750 credit score, a 10% down payment, and your prospective home's purchase price is $200,000. You represent less risk to lenders than someone with a 620 credit score and a 3.5% down payment who wants to buy a $300,000 home.
A lender might give you a lower interest rate because they're loaning you less money and your higher credit score tells them you're more likely to pay them back.
A tip on interest rates: If you're applying for quick quotes online, beware. The mortgage amount and rate quotes you receive may not reflect your true borrowing power. The only way to get an accurate estimate of your rate and borrowing potential is to get preapproved with a lender.
I'm a first-time homebuyer. Should I get an FHA loan?
Flexible credit and DTI requirements, plus the low down payment option, may smooth the homebuying path. Many buyers can afford monthly mortgage payments but are struggling to save money upfront.
In fact, over 80% of FHA purchase loan use is by first-time buyers, according to HUD.
But be sure to consider all of your loan options. If you're a veteran, you may be better served with a 0% down VA loan. USDA loans also have a 0% down payment option.
You can also use gift funds for closing costs with most loan types. That may be a more affordable way to get into your first home.
If you have excellent credit, you may want to explore conventional mortgage options. You can get a conventional loan with as little as 3% down, though if you put down 20%, you won't need private mortgage insurance (PMI).
And if you can't put 20% down at the outset, the PMI requirement goes away once you reach 20% equity. Even better, you won't need to refinance to eliminate that cost the way you would with an FHA loan.
The key to choosing the right loan as a first-time homebuyer is to understand all of the options available to you. Request quotes from several lenders, and choose the one that not only gives you the best deal but the one you trust. If you do want to go with an FHA mortgage, make sure they have plenty of experience with these types of loans.
Pros and cons of an FHA loan
FHA loans make sense for a lot of borrowers - as in 8.3 million of them as of 2020. But they're not for everyone. It's worth understanding the upsides and drawbacks of FHA mortgages before you make a decision.
|Low credit score requirements||Mortgage insurance required for the life of the loan|
|Low down payment||Upfront mortgage insurance|
|No income limits||Property restrictions|
|Higher DTI limits||No investment properties|
If FHA loans sound good but you're not sure if they're right for you, you're not alone. Choosing a mortgage type is a big decision, and there are a lot of variables to consider. Fortunately, your lender can help you through it.
By getting preapproved, you'll find out important information about how much money you can likely borrow and the loan programs for which you qualify. You can then use that information to start a conversation with your lender - and start looking for that perfect house.