FHA loans are one of the government loan programs available today. Unlike USDA loans, though, FHA loans don’t have income limits. In other words, you can make as much money as you want and still qualify for an FHA loan.
The FHA cares more about whether you can afford the loan rather than you making too much to use the program. Granted, some people may decide that they don’t need FHA loans because they make too much, but that’s a personal decision.
Keep reading to learn what the FHA looks at and how it affects your eligibility for the loan.
Qualifying for the FHA Loan
The FHA has more flexible guidelines than your standard conventional loans. Typically, you need:
- 580 credit score
- 31% housing ratio
- 41% total debt ratio
This means that you can have ‘fair’ credit and higher than normal debt ratios and still get a loan. But the FHA doesn’t say that you can make ‘too much’ and not qualify. What they want to know is that your income covers the cost of the loan and leaves you enough money each money to cover the daily cost of living.
It’s important to know that FHA loans require you to pay mortgage insurance for the life of the loan. This can add from $50 to a few hundred dollars to your monthly payment. That’s why it may not make sense for borrowers that make enough money to qualify for other financing options.
The debt ratios are comparisons of your debts to your gross monthly income (income before taxes). Your housing ratio consists of the total mortgage payment including the real estate taxes, homeowner’s insurance, and mortgage insurance. This payment shouldn’t be more than 31% of your gross monthly income, but it can be less than 31%.
The total debt ratio consists of all of your debts – this includes your credit card payments, car payments, student loan payments, and any other installment debt you have plus your new mortgage payment. The total payments shouldn’t exceed 41% of your gross monthly income, but it could be less.
Getting a High Enough Loan Amount
One area that you may run into an issue is with the loan amount you can get. If you have a high income that allows you to afford a loan amount above the FHA’s limits for your county, you may not be able to secure FHA financing in the traditional manner. Here’s how it works.
The FHA has a limit for your county. This is the maximum loan amount that they will guarantee for the lender. This means that the FHA will pay the lender back 25% of the loan amount that they guarantee if you default on the loan. If you need a loan amount higher than what the FHA will guarantee for that period, you’ll have to make a larger down payment.
Normally, with a credit score of at least 580, you only need to put 3.5% down on a home. If your loan amount exceeds the FHA guaranty though, you’ll be responsible for 25% of the difference. For example, if the loan limit for your area is $250,000 and you need a loan amount of $260,000, you would need to make an additional down payment of 25% of $10,000 or $2,500.
This is where income limits come into effect. If you make enough money that you qualify for a higher loan amount and you want that higher loan amount, you’ll have to make a choice. You can either make the higher down payment or you can see if you qualify for conventional financing. In order to qualify for conventional financing, you’d need:
- Minimum 680 credit score
- Maximum 28% housing ratio
- Maximum 36% total debt ratio
If you don’t meet these requirements, you can still get FHA financing, you’ll just need to make the larger down payment. Conventional loans typically require a down payment of 5%, so the additional down payment on the difference between the FHA guarantee and the loan amount you need may not be all that different.
The FHA doesn’t set income limits, per se. Instead, they limit the loan amount that they will guarantee. Many borrowers with higher incomes naturally want higher loan amounts because they purchase higher priced homes. If this is the case for you, compare your options. You’ll have to make a larger down payment on the FHA loan, which may not make paying the mortgage insurance for the life of the loan worth it. Compare your options to see which loan makes the most financial sense.