A Guide to FHA Loan Income Qualifications

Contrary to what many think, FHA loan options are not available to unqualified borrowers. Many believe they can turn to this government lender when they are unable to secure a private loan option. However, you must qualify for a private loan in order to receive an FHA guarantee. One of the primary requirements for qualifying for a private loan with an FHA guaranty is income.

Consistent Employment

The primary issue any lender, including the FHA, is looking for is stability. You should be able to show that your income has been stable for at least two years. In those two years, you should have no income gap due to unemployment, time off for school or time off for family. In the best scenario, you will have been employed for at least 2 years by the same employer. However, it is possible to get a loan if you simply show your salary has increased moderately for at least two years.

This means even self-employed individuals will have the opportunity at an FHA mortgage if they can prove their salary has been stable over time. Your employer can provide income verification for your loan application. If you work for yourself or own a business, then you will be able to use tax return documents to show your stated income each year.

Income to Debt Ratio

The size of your income is not as important as the income to debt ratio you carry in order to get approved for a loan. The size of your income will affect only the limits of your mortgage loan. Even those with relatively low incomes can secure a mortgage, they may just have a smaller limit and therefore a less expensive home.

The terms of the mortgage, though, depend directly on the ratio of income to debt you currently have. Before applying for a mortgage, pay down as many debts as possible, and maintain only low balances on your credit card. Aim for a debt of only 10% of your total income each year and lower if possible. This should qualify you for any FHA loan so long as you meet other credit requirements.

Debt  Ratio Example

For example, let’s assume a borrower earns $3500 per month gross income. According to FHA’s general guidelines, the maximum debt to income ratio is 41%.  The maximum mortgage payment for a borrower would be $1435. This amount would include all taxes and insurance costs.

FHA offers flexibility with the guidelines. If, for example, a borrower has part time job for less than two years, the income cannot be used, but the debt ratios can be exceeded. In the example above, the maximum payment may be a little higher than the $1435 established guideline.

Combining Incomes for a Joint Mortgage

If you are purchasing a home with another person, such as a spouse, you can increase the limits of your mortgage by applying jointly. This allows you to combine two mortgages for the application, meaning you will actually double the size of your potential mortgage limits. Most married couples elect to do this.

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