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How Much House Can You Afford With An FHA Loan?

August 18, 2023 5-minute read

Author: Ashley Kilroy

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A pivotal step in the home buying journey is gaining a clear grasp of how much house you can afford with a loan from the Federal Housing Administration (FHA). Beyond finding your dream home, it's about balancing your aspirations and financial reality harmoniously. This becomes particularly important when considering an FHA loan, renowned to first-time home ;buyers for its relaxed credit requirements and lower down payment options. 

Here's how to figure out what you can afford and what eligibility requirements you need to qualify for an FHA loan. 

Start With Affordability Calculations 

To assist in gauging how much house is within your reach, the Rocket Mortgage® Affordability Calculator proves invaluable. It serves a dual purpose by first helping you evaluate the home that aligns with your financial situation, incorporating factors such as location, annual income, monthly debts, and available funds for the down payment and closing costs. Secondly, if you already have a specific price range, the calculator estimates the necessary cash required for your down payment and closing costs.

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Factors That Impact How Much You Can Afford With An FHA Loan 

When evaluating the affordability of a home under an FHA loan, several crucial factors come into play, impacting your financial readiness for the home buying journey. Familiarizing yourself with these key elements is essential for informed decision-making and can qualify you for the most favorable interest rates, further optimizing your overall financial outcome.

Your Location

Your location significantly affects what you can afford with an FHA loan due to varying home prices, property taxes and living costs in different areas. Here's how location plays a role:

  • Home prices: Markets differ, impacting the down payment required to meet FHA guidelines. Higher-priced areas may demand a larger down payment.
  • Property taxes: Local property tax rates impact your monthly payment when you have an escrow account.
  • Cost of living: An area’s higher cost of living reduces disposable income, affecting your mortgage payment affordability.
  • 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. Higher limits in some areas may allow for a larger loan amount.

Your Debt-To-Income Ratio (DTI)

Your debt-to-income ratio (DTI) significantly assesses your affordability. You can calculate your DTI by dividing your monthly debt payments by your gross income. It affects qualification, borrowing capacity, and monthly mortgage payments. A lower DTI allows for a larger loan amount and a more manageable mortgage, ensuring you meet the FHA's requirement of a DTI below 45%.

For example, suppose your total monthly debt payments, including the potential mortgage, amount is $2,500, and your gross monthly income is $6,000. In that case, your DTI is 41.67% ($2,500/$6,000), aligning well within the FHA's maximum threshold and increasing the likelihood of loan approval.

Your Down Payment Amount

Your savings significantly influence what you can afford when using an FHA loan. To qualify for an FHA loan, you must contribute a minimum of 3.5% as a down payment. For example, if you're purchasing a $200,000 home, you need at least $7,000 (3.5% of $200,000) to meet this requirement. However, consider additional costs associated with home buying, commonly known as closing costs, encompassing expenses like loan fees, appraisals and title insurance.

It's also crucial to factor in the mortgage insurance premium (MIP) charged by the FHA. MIP is collected in two ways: an upfront payment of 1.75% of the purchase price is mandatory at closing and an annual MIP is added to your monthly payment at a prorated rate.

The monthly MIP costs vary based on factors such as your loan amount, the size of your down payment and the length of your repayment term. Generally, closing costs for FHA loans typically range between 3% and 6% of the purchase price.

Your 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 required down payment and the amount you'll pay in monthly mortgage installments.

FHA has specific requirements based on FICO® credit scores:

  • FICO® Score at least 580: If you have at least a 580 credit score, you qualify for a relatively lower down payment of 3.5% of the home's purchase price. If you're buying a home for $200,000, you'll need a down payment of $7,000 (3.5% of $200,000) to meet this FHA requirement.
  • FICO® Score between 500 and 579: If your credit score is between 500 and 579, the FHA requires a higher down payment of 10%. Using the same example, with a home priced at $200,000, you'd need a down payment of $20,000 (10% of $200,000) if your credit score falls within this range.

Keep in mind, some lenders may have a specific minimum credit score requirement. For example, Rocket Mortgage® requires a minimum score of 580.

Additionally, lenders typically adjust interest rates based on credit scores. If your credit score is lower, you might face a slightly higher interest rate on your FHA loan. This could result in a more significant overall loan amount and a higher monthly payment.

The Lender You Choose

While lenders set interest rates partly based on rates targeted by the Federal Reserve, they do have some flexibility in how they adjust their own rates to the federal funds rate number. Each lender will adjust differently based on several factors including current market conditions, loan terms, a borrower’s credit score and competitor pricing.

Shopping around for a lender is essential and helps ensure you understand their pricing structure. This is particularly vital because when lenders increase rates, it directly affects the affordability of homes for consumers. Higher interest rates lead to higher monthly mortgage payments, reduced buying power and cost you more money throughout the life of the loan. 

Considering these factors, carefully comparing lenders' rates and terms helps you make an informed choice, secure an initially favorable rate and avoid hidden costs tied to rate fluctuations.

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How To Qualify For An FHA Loan

By exploring the key factors that influence FHA loan eligibility, you can better understand how to qualify for this type of mortgage. Here are the FHA loan requirements you must meet:

  • Credit score: Borrowers with a credit score of 580 or more can qualify for an FHA loan with a down payment of 3.5% of the home's value. If a lender allows lower scores, those with credit scores between 500 and 579 can qualify with a 10% down payment.
  • Appraisal: The home must be appraised by an FHA-approved appraiser.
  • Primary residence: The property you're purchasing must be your primary residence; it can't be an investment property or a second home.
  • Occupancy: You must occupy the property within 60 days of closing.
  • Inspection: An inspection is required to ensure the property meets minimum standards.
  • Debt-to-income ratio (DTI): Your DTI should be below 45%, and your monthly mortgage payment should not exceed 38% of your monthly gross income in certain circumstances.
  • FHA loan limits: The maximum loan amount varies based on the county and property values.
  • Steady employment history: You must demonstrate a steady employment history and your income should be verifiable with documentation.

The Bottom Line

Understanding the crucial factors that impact your affordability under an FHA loan is vital for a successful home purchase. Your savings, the 3.5% mandatory down payment, closing costs, MIP and the potential benefits of a higher down payment all play a significant role. With this knowledge, you'll feel empowered to make informed decisions, ensuring your home purchase aligns with your budget. If you're ready to finance your home purchase, start the mortgage approval process today

Find out if an FHA loan is right for you.

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Headshot Ashley Kilroy

Ashley Kilroy

Ashley Kilroy is an experienced financial writer. In addition to being a contributing writer at Rocket Homes, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.