How Much House Can You Afford With An FHA Loan?

Whether you’re considering a conventional loan, a government-backed mortgage or another loan type, knowing how much house you can afford will become the foundation of your home buying budget. This key figure can help focus your house hunt and steer initial conversations with mortgage lenders.

Use our guide to figure out what you can afford with a Federal Housing Administration (FHA) loan and what eligibility requirements you’ll need to meet to qualify for this popular government-backed loan option.

FHA Loan Affordability Basics

Prospective home buyers should collect some key financial details upfront to get reliable results from a mortgage calculator.

• Down payment: FHA loan borrowers will make at least a 10% down payment if their credit score ranges from 500 – 579. With a 580 credit score or higher, borrowers can make as little as a 3.5% down payment.
• Loan value: If you’re buying a property in an FHA-designated low-cost area, the mortgage limit for a one-unit property is $498,257. In a high-cost area, the FHA 2024 loan limit is $1,149,825.
• Interest rate: Most mortgage or home affordability calculators typically require an interest rate. For most of 2024, FHA 30-year fixed rates have ranged from 6% – 7%. Your credit score and financial profile will also affect the rate a lender offers.
• Monthly debt: Lenders use recurring monthly debt payments to help calculate your debt-to-income ratio (DTI). Lenders concentrate on a borrower’s DTI ratio because it helps them assess whether you can afford a monthly mortgage payment on top of your existing debts. Lenders typically require a DTI ratio of 45% or less to qualify for an FHA loan.

Even educated estimates for these key financial figures can provide a reasonably accurate idea of future monthly mortgage payments, helping you determine how much house you can afford with an FHA loan.

Mortgage Affordability Calculator

The Rocket Mortgage® home affordability calculator is a valuable tool that helps borrowers gauge how much house they can afford.

The calculator takes location, annual income, monthly debts, down payment and closing costs into account to suggest a home price that should work with your home buying budget.

Additional Factors That Affect How Much You Can Afford With An FHA Loan

Buying a home is a process that involves many moving parts, including the various factors that go into calculating home affordability. Here are some factors aspiring homeowners often overlook:

Location

Your location will significantly affect what you can afford with an FHA loan. Home prices, property taxes and living costs will vary by area. Here's how location factors into affordability:

• Home prices: In higher-cost areas, while the down payment requirements remain the same – 3.5% or 10%, depending on your credit score – you’ll need to save for a larger down payment because homes are more expensive.
• Property taxes: Local property tax rates can significantly impact your monthly payment.
• Cost of living: A higher cost of living can strain your ability to afford your mortgage payment because it leaves you with less disposable income.
• Local market: Market conditions, like supply and demand, can influence home prices, impacting what you can afford.
• FHA loan limits: Loan limits vary by county based on local median home prices. You may qualify for a larger loan amount in an area with higher limits.

Debt-To-Income Ratio (DTI)

Your DTI ratio is a crucial factor in determining what you can afford. It affects loan qualification, borrowing capacity and your monthly mortgage payments.

To calculate DTI, divide your monthly recurring debt payments by your gross income. A lower DTI can help you qualify for a larger loan amount and a more manageable monthly mortgage payment. The FHA allows a DTI ratio of up to 45%.

Suppose your total monthly debt payment, including your potential mortgage, is $2,500, and your gross monthly income is $6,000. Your DTI ratio would be 41.67% ($2,500 ∕ $6,000). Because the DTI ratio falls under the FHA's maximum threshold, it increases the likelihood of loan approval.

Mortgage Insurance Premium (MIP)

FHA loans have mandatory mortgage insurance premiums (MIPs). There are two ways borrowers pay for MIP. First, borrowers make a one-time, upfront payment equal to 1.75% of the home mortgage amount at closing. Then, an annual MIP is divided by 12 and added to your monthly mortgage payment.

The cost of monthly MIP varies by loan amount, the borrower’s down payment and the loan repayment length.

Credit Score

Your credit score is another important factor that significantly impacts what you can afford when considering an FHA loan. It directly affects both your down payment and monthly mortgage payment amount.

• FICO^® Score at least 580: With a 580 credit score, you can qualify for a down payment equal to 3.5% of a home's purchase price. If you bought a home for $400,000, you would make at least a $14,000 down payment to meet the FHA requirement.
• FICO^® Score 500 – 579: When a credit score hovers between 500 – 579, the FHA requires at least a 10% down payment. A home on sale for $400,000 would require at least a $40,000 down payment.

Some lenders set their own minimum credit score requirements. For example, Rocket Mortgage requires a minimum score of 580.

Lenders typically fix interest rates based on credit scores. If your credit score is in the lower ranges, a lender may set a slightly higher interest rate on your FHA loan, which can translate to a larger overall loan amount and a higher monthly payment.

The Lender You Choose

Tips For Increasing How Much You Can Afford With An FHA Loan

Now that you know the factors that go into calculating how much home you can afford with an FHA loan, here are some tips to help you increase your purchasing power:

• Improve your credit score: Boosting your credit score to 580 or higher can lower your minimum required down payment to 3.5%. You’ll also increase your chances of qualifying for a significantly higher loan amount and a lower interest rate.
• Save for a bigger down payment: The larger your down payment, the less you’ll need to borrow, lowering your monthly mortgage payment. When you make at least a 10% down payment, you can stop paying MIP after 11 years. With a down payment of less than 10%, you’ll pay MIP for the life of the loan.
• Lower your DTI: Lowering your DTI can help you get approved for a higher loan amount and may increase your ability to afford a higher monthly payment.
• Talk to multiple lenders: Different lenders offer different terms for mortgage loans, including FHA loans. Review different loan offers to determine what you can comfortably afford with your home buying budget. Comparing offers may also help you save on closing costs and get a better interest rate.

The Bottom Line

Understanding the crucial factors that can impact your ability to afford a home with an FHA loan is vital for a successful home purchase. Your savings, the size of your down payment, closing costs and MIP all play a significant role.