The Federal Housing Administration (FHA) offers mortgage insurance on loans made by approved lenders nationwide. FHA loans are a popular option for homebuyers because they require lower down payments and credit scores compared to conventional loans.
While FHA loans don’t have set income limits, you must have sufficient income to make the monthly mortgage payments. The lender reviews your debt-to-income ratio to determine if you qualify.
This article provides an overview of FHA loan requirements and limits based on your income, credit score, down payment, and other factors. Read on to learn more about qualifying for an FHA mortgage in 2024.
What is an FHA Loan?
An FHA loan is a mortgage issued by private lenders but insured by the Federal Housing Administration. This government backing makes lenders more willing to approve borrowers with lower credit scores who may not otherwise qualify for a conventional loan.
Some key benefits of FHA loans include:
- Lower minimum credit score requirements – as low as $500
- Lower down payments, with a minimum of 3.5% down
- More flexible debt-to-income (DTI) ratio guidelines
- Access to down payment assistance programs
- Ability to use gifts for down payment funds
As with any mortgage, you repay an FHA loan over a set period, usually 15 or 30 years. The loan is secured by the property you purchase.
FHA loans do require mortgage insurance, no matter your down payment size. However, they may come with lower interest rates than conventional loans.
FHA Loan Income Requirements
The FHA doesn’t impose specific income limits on its loans. Whether you qualify depends more on having enough stable income to afford the monthly mortgage payment along with your existing debts.
Lenders want to see that you have a reliable source of income. They’ll verify this by reviewing documents such as:
- Recent pay stubs
- W-2 and tax return forms
- Proof of any additional income
- Bank statements
Self-employed borrowers may need to provide profit and loss statements or multiple years of tax returns.
Your income can come from a variety of sources, including:
- Full-time or part-time employment
- Self-employment
- Retirement and pensions
- Social Security or disability benefits
- Investment income
- Alimony, child support or separate maintenance
- Other public assistance programs
You must show at least two years of consistent income from these sources. Gaps in employment may make approval more difficult.
Calculating Your Income
Lenders will look at your gross monthly income, before any deductions are taken out. This provides the full picture of how much you earn. Bonuses, overtime, commissions, and other variable income will also be considered if you can show a two-year history of receiving it.
If you’re married, your spouse’s income can be included as well. The total household income is used to determine if you qualify for the loan amount you need.
For self-employed borrowers, lenders may calculate income by looking at your business’s net profit plus salary and depreciation. Or they may take an average of your income over the last two years to account for fluctuations.
Debt-to-Income Ratio
While FHA loans don’t have a minimum income requirement, your income must be sufficient to keep your debt-to-income ratio within acceptable limits.
Your DTI compares your total monthly debt payments to your gross monthly income. FHA loans allow DTIs up to 43% in most cases. On a case-by-case basis, some lenders will go up to a 50% DTI ratio if you have a good credit score or sizeable down payment.
A lower DTI percentage makes it easier to qualify and shows you can truly afford the mortgage payment. Keeping your DTI at 43% or below is recommended when applying for an FHA loan.
FHA Loan Limits
Along with flexible income standards, FHA loans offer relatively high borrowing limits.
For a single-family home in 2024, the standard FHA loan limit is $498,257 in most U.S. counties. But it goes up to $1,149,825 for high-cost areas like San Francisco and New York City.
In Alaska, Guam, Hawaii, and the U.S. Virgin Islands, where construction costs are elevated, borrowers can get FHA loans up to $1,724,725.
These limits apply to one-unit properties. Different FHA loan limits exist for two- to four-unit properties which you purchase as your primary residence.
FHA loans can only be used to purchase or refinance a primary residence – not for investment properties or vacation homes. The home you buy must be for your own occupancy within 60 days of closing.
Additional FHA Loan Requirements
Beyond income and loan limits, FHA mortgages come with a few other basic requirements. These include:
Credit Score
To qualify for an FHA loan with 3.5% down, you need a minimum credit score of 580. With a 10% down payment, you may get approved with a score as low as 500.
Many lenders prefer scores of at least 620 for better approval odds. The lower your score, the harder it can be to find a willing lender.
Down Payment
The minimum down payment is 3.5% of the purchase price if your credit score is 580 or above. At the lower end of 500 to 579, you must put down at least 10%.
Gifts from relatives or nonprofits can be used for your down payment. The seller can also contribute up to 6% of the home’s price toward closing costs through seller credits.
Mortgage Insurance
FHA loans require both upfront and annual mortgage insurance premiums. This adds to your long-term costs but also reduces risks for the lender.
On a $300,000 loan, you’ll pay an upfront MIP of 1.75% of the loan amount plus an annual MIP of 0.55% of the balance divided into monthly payments.
Home Inspection
The property must be appraised by an FHA inspector to ensure it’s habitable and meets minimum property standards. Home inspections identify any repairs needed before closing.
Owner Occupancy
At least one borrower must intend to occupy the home as their primary residence within 60 days of closing. You must live there for at least 12 months.
Foreclosure Waiting Period
You generally need to wait three years after a foreclosure to qualify for an FHA loan. Bankruptcy filings also require one to two year waiting periods.
Seller Contributions
The seller can cover up to 6% of the home’s purchase price to pay for your closing costs and prepaid items. This can help reduce your upfront cash needed.
Loan Term
FHA loans are available in 15, 20, or 30-year terms. The 30-year option offers lower monthly payments, while the shorter terms build equity faster.
Assumable Financing
FHA loans can potentially be assumed by a new buyer if you sell the home. This may give it value if interest rates have risen substantially since you got the loan.
READ ALSO: What to Expect During an FHA Home Appraisal
Tips for Qualifying for an FHA Loan
Because FHA loans are more flexible than conventional mortgages, they open homeownership opportunities for more buyers. Here are some tips for successfully qualifying:
- Improve your credit score – Request a copy of your credit report and work to resolve any errors. Getting scores above 580 will make approval much easier.
- Reduce debt balances – Pay down revolving balances like credit cards to lower your DTI ratio before applying.
- Save for a down payment – Even a 3.5% down payment could be $15,000 or more. Start saving early so this won’t delay your home purchase.
- Limit new credit inquiries – Each application triggers a hard inquiry that can ding your score temporarily. Only apply for what you need.
- Verify income with documentation – Have pay stubs, tax returns, and bank statements ready to present your full financial picture.
- Shop with FHA-approved lenders – Not all lenders offer FHA loans. Seek out one with experience navigating FHA requirements.
- Consider down payment assistance programs – If funds are limited, grants and low interest second loans may help cover your down payment.
With proper preparation and understanding of FHA loan requirements, you can position yourself to qualify for the competitive rates and benefits these mortgages offer.
To Recap
FHA loans provide more flexible qualifying guidelines, so more buyers can achieve home ownership. There are no set minimum income limits, and you may qualify even with past credit setbacks.
While approval is easier than with conventional loans, you still must demonstrate stable income sufficient to meet FHA’s debt-to-income ratio requirements. Preparing in advance and targeting a 43% DTI or lower can help ensure positive results.
Connecting with an experienced FHA lender is key to navigating the loan process. Be ready to provide all necessary income, employment, and credit documentation.
With an FHA mortgage, owning your own home – rather than renting – may finally become a reality in 2024, even with an imperfect financial profile.
FHA Loan Requirements FAQ
Anyone considering an FHA mortgage likely has questions about the eligibility rules and documentation involved. Here are answers to some frequently asked questions on qualifying requirements.
Is income verified for an FHA loan?
Yes, lenders will thoroughly verify and document your income, assets, and expenses when applying for an FHA loan. This includes reviewing tax returns, pay stubs, and bank statements. You must prove your income is steady and sufficient to support the mortgage payment.
Do FHA loans require two years of employment
Typically, FHA guidelines require borrowers to show a two-year history of stable income from the same job or line of work. However, exceptions can be made for those who have recently graduated college or changed jobs for growth opportunities.
As long as you haven’t switched jobs out of necessity or been fired, gaps in employment may be acceptable on a case-by-case basis. Just be prepared to explain any employment gaps or changes to the lender.
Can I qualify for an FHA loan while self-employed?
Yes, self-employed borrowers can qualify for FHA loans. Expect to provide proof of income over the last two years with copies of your business tax returns and current profit and loss statements.
Consistency of income is closely evaluated. Your personal and business credit will also be reviewed to assess repayment ability. Two years of self-employment in the same business is recommended.
What credit score is needed for an FHA loan?
The minimum FHA credit score requirement is 500 or 580, depending on your down payment amount. Borrowers with scores of 580 or above qualify for 3.5% down. With 500 to 579, 10% down is required.
Many lenders prefer credit scores above 620 for an easier approval process. The higher your score, the better mortgage rates and terms you can potentially obtain. Bad credit isn’t an automatic disqualification, but it does make approval more challenging.
Can I get an FHA loan after a foreclosure or bankruptcy?
It is possible to get an FHA loan after experiencing foreclosure or bankruptcy, but there are waiting period requirements. You must wait at least three years after a foreclosure to apply for an FHA mortgage. For Chapter 7 bankruptcy, the waiting period is two years, and just one year for Chapter 13.
These events stay on your credit report for seven to ten years but show you have recovered if you now maintain good credit and income. Expect to put 10% down if your credit score is still below 580.
What debt-to-income ratio is needed for FHA loan approval?
FHA loans allow more lenient DTI ratios than conventional loans. In general, your total monthly debt payments should not exceed 43% of your gross monthly income. Some lenders will go up to 50% DTI for well-qualified borrowers.
Aim to keep your ratios as low as possible, below 43%, for the strongest approval odds. Calculate your DTI to see where you fall before applying for maximum financing success.
Can I qualify for an FHA loan on disability or social security income?
Yes, you can qualify for an FHA loan if your income comes from disability payments, Social Security, or SSI benefits. As with employment income, you must show a consistent two-year history of receiving benefits to have this income counted towards the mortgage.
Any non-taxable income like Social Security will be adjusted upward by lenders when calculating your debt ratios since it requires less take-home income to cover living expenses.
In another related article, FHA Loan Flooring Requirements: Minimum Property Standards and Options
