Fungi play a vital role in how well soils perform and are responsible for maintaining homeostatic states in ecosystems, but researchers still don't have a solid way to quantify fungal diversity (e.g., number of species) with how well the soil performs as an ecosystem (e.g., its ability to produce food). Therefore, this study's purpose was to build the Fungal Health Index (FHI), which serves as a bio-indicator of soil degradation or restoration assessment. Methods included collecting soil samples from three different sites in Al-Anbar Province, Iraq (i.e., degraded, restored areas that have been planted with shrubs and grasses, and reference). Each site had five biological replicates sampled from 0-20 cm deep in the soil, and each sample underwent study-specific NGS sequencing targeting the fungal ITS region so that the FHI could be calculated using the ratio of beneficial fungi to pathogenic fungi. Statistical analysis was done on soil physical and chemical characteristics like pH, salinity, and organic matter. Results show that fungal communities and FHI values (Fungal Habitat Index) vary statistically significantly between the sites. With a maximum FHI score of 0.89 found at the reference site, this indicates a stable ecosystem compared to a degraded soil site with an FHI of 0.35 due to high levels of pathogenic fungi. A restored ecosystem with an intermediate FHI score of 0.68 is indicative of partial recovery of soil functions associated with degenerative processes. There are positive correlations found between fungal habitat index and organic matter and negative correlations with salinity. This study provides further evidence that the Fungal Habitat Index (FHI) is a good and reliable measure of soil health with a particular focus on functional diversity. Recommendations for action include using the FHI as a monitoring tool and creating financial incentives to encourage sustainable agricultural practices to achieve improved soil health and greater ecosystem stability.