How Much House Can I Afford to Buy When Using an FHA Loan?

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Here are five key points to take away from this guide:

• Home buyers should create a budget before applying for an FHA loan.
• Mortgage lenders use “DTI ratios” to determine how much you can afford.
• Ideally, your debts should use up no more than 43% of your gross income.
• FHA loans have maximum size limits that vary by county, explained below.
• But it’s your job to decide how much house you can comfortably afford.

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The Federal Housing Administration (FHA) loan program is popular among home buyers who can’t afford a large down payment. It allows eligible borrowers to put down as little as 3.5% of the purchase price.

The mortgage lender will decide how much you’re able to borrow by using certain formulas and procedures. But they cannot tell you where your financial comfort zone lies. That’s your job.

Before applying for an FHA loan, borrowers should determine how much house they can comfortably afford by creating a basic budget. We’ve offered two methods below.

Measuring Affordability When Using an FHA Loan

We introduced several important concepts at the start of this article, and you’ll need to consider all of them to decide how much house you can comfortably afford to buy.

Here are the three most important points you should take into account:

1. The FHA loan limits in your county
2. Your debt-to-income ratio
3. Your own personal housing budget

So let’s talk more about these three things, starting with the official loan limits…

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Step 1: Identify the FHA Loan Limit for Your County

FHA loans are insured through the federal government. This insurance protects mortgage lenders from financial losses that might occur when a borrower defaults or fails to repay the loan.

But the FHA will only insure home loans up to a certain amount. This program is mainly geared toward home buyers at the low-to-middle part of the pricing spectrum. It’s not designed for high-end homes at the top of that spectrum.

The official FHA loan limits can vary by county because they are based on median home prices. They can also change from one year to the next, usually increasing to keep up with home values.

The 2024 limits range from $498,257 to $1,149,825 for a single-family home.

The official loan limits affect how much of a house you can afford to buy when using an FHA loan, by limiting the amount you are able to borrow from the lender.

If you qualify for the FHA loan program and want to buy a home that falls within these limits, you could finance up to 96.5% of the purchase price. That means making a down payment of at least 3.5%.

You can find your county’s limits by using the searchable database on the HUD.gov website.

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Step 2: Consider Your Debt-to-Income Ratio

The FHA also has guidelines for a borrower’s debt-to-income ratio, or DTI. And this too can affect the amount you’re able to borrow and the type of house can afford.

The DTI ratio compares a person’s earnings to their recurring debts. If I spend 30% of my gross monthly income on my recurring monthly debts (credit cards, auto loan, and the mortgage payment itself), then I have an overall DTI ratio of 30%.

The FHA loan program limits most borrowers to having a debt-to-income ratio no higher than 43%. But borrowers with good credit and other compensating factors could have a DTI up to 50%.

When it comes to mortgage qualification, you have two of these DTI ratios.

• Front-end ratio: Only uses your housing-related debts, such as the principal loan amount, mortgage rate, and property taxes.
• Back-end ratio: Takes all of your recurring monthly debts into account, including the estimated mortgage payment you would be taking on.

The table below shows the maximum qualifying DTI ratios for FHA loans. Note that the middle column contains two numbers separated by a slash. The first number is the front-end ratio. The second number is the back-end ratio that considers all debts combined.

Here’s what you should take away from this table:

• The FHA generally limits borrowers to a maximum DTI ratio of 43%.
• But borrowers with compensating factors can have ratios up to 50%.
• Borrowers with ratios above 50% typically don’t qualify for FHA loans.

Now you have two pieces of the formula that determines how much of a house you could afford with an FHA-insured mortgage loan. You understand (1) the official loan limits for your county and (2) the maximum allowable debt-to-income ratio.

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Step 3: Create Your Own Housing Budget

Last but not least, you should have your own housing budget on paper before applying for an FHA loan.

Ultimately, you are the only person who can decide how much of a monthly mortgage payment you’re comfortable taking on. And this will require some basic math on your part.

Method #1: Subtract Expenses From Income

You can create a basic housing budget by subtracting all of your monthly expenses from your monthly income, and then working down from the remainder. Here’s how to approach it.

1. Calculate gross monthly income. Take your annual income and divide it by 12. (Example: $75,000 / 12 = $6,250 per month)
2. Add up all of your recurring non-housing monthly debt payments including car loans, student loans, credit card minimums, etc. (Example: $1,000 + $300 + $250 = $1,550)
3. Subtract your total monthly debt payments from your gross monthly income. (Example: $6,250 – $1,550 = $4,700)
4. Now come down from that number. The $4,700 figure shown above is the absolute most this person could spend on a monthly mortgage payment. But that wouldn’t leave any income left over for savings, grocery shopping, recreation, etc. They’ll need to subtract those items as well. (Example: $4,700 – $2,000 = $2,700)

In this example, the home buyer determines they do not want to spend more than $2,700 per month on a mortgage payment. If a lender pre-approves them for a loan amount that would result in a much larger monthly payment, it should raise a red flag.

Method #2: Use the 28% Rule of Thumb

You could also determine your housing budget using a percentage method. For example, many financial advisors say you shouldn’t spend more than 28% of your gross monthly income on your mortgage payment.

To calculate this, you would simply multiply your gross monthly income by 0.28 (the decimal form of 28%). If my monthly income before taxes is $6,250, I would multiply that by 0.28 to determine a maximum mortgage payment range. (Example: $6,250 x 0.28 = $1,750)

Just know that the 28% recommendation is more of a guideline than a rule. Your actual housing budget will depend on your specific financial circumstances and goals.

The takeaway: Do the math for yourself to determine how much house you can afford with an FHA loan. Have a housing budget on paper before you start talking to lenders, and stick to it as much as possible.