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fha income

What Are FHA Loan Income Requirements?

By Joe Silver

Did you know that FHA loans account for almost ¼ of all closed home loans in the US today for people with all ranges of incomes? FHA loan income requirements are guaranteed by the Federal Housing Administration. Thus, lenders are more likely to extend credit to those who have lower credit scores and incomes.

FHA loans are fairly easy to qualify for, and certainly more so than conventional loans. But FHA did tighten up qualification standards in 2016 on income, credit and type of work, so it will benefit you to study what those changes are so you increase your odds of being approved.

FHA loans are definitely worth getting for many people because FHA loan income requirements are simple and interest rates are usually 15 basis points lower than conventional rates. Down payments are as low as 3.5% for people with credit scores 580 or higher.

Income and Debt Changes at FHA

There have been some recent changes in income and debt requirements for FHA loans that could make it harder for some to qualify. Most of the updates are regarding how income is calculated by the underwriter on a mortgage application. The debt to income ratio on FHA loans is pretty easy-going compared to Fannie or Freddie. Also, changes have been made in how debt is treated in the underwriting process. Here are the key areas where changes have been made:

  • Student loans: In the past, loans in deferment for 12 months or more did not count towards your debt to income ratio. Now all loans that are in deferment do count towards your DTI. FHA assumes that the payment is 2% of the outstanding balance. So for a $25k loan, FHA assumes a payment of $500.
  • Credit cards: In the past, authorized users on a credit card did not have any responsibility to make monthly payments, and payments were not counted towards the borrower's DTI. Today, authorized users on the card have to include the minimum payment on the card in their DTI, unless cancelled checks from the last year show that the primary owner of the card made the payments.
  • Self-Employed: In the past, self-employed borrowers had to show two years of work history. This could include any time that you spent in training and education. Now, to use your self-employed income, you have to show a minimum of two years of specific work experience in your industry. You will also need to show two years of tax returns.
  • Part time income: To use your part time income on an application, you were not required before to show a history of earning that income. Today, you must show two years of uninterrupted part time wages.
  • Overtime income: You could use overtime income in the past without having to show a past history of making those wages. Now to use your overtime income, you need to show at least a two year history of getting those wages. You may also have to show proof from your employer.
  • Gift funds: You can get the entire down payment for your FHA loan from a gift from a family member or close friend. Before, documentation requirements may have been waived if the underwriter allowed it. Now all gift funds for a home down payment have to be sourced and documented. This will also include any large deposits put into a bank account.

Current Debt to Income Requirements for FHA Loans

Debt to income ratio means the total amount of your minimum monthly payments; this will include the principal, interest, tax and insurance on your mortgage, divided by the monthly total income. Keep in mind that FHA does not set exact Debt to Income standards, but FHA approved lenders will have their own standards; these are referred to as overlays:

  • A borrower with a credit score under 620 will have a maximum allowed DTI at 43%.
  • The mortgage company can require a lower DTI for those under 620 credit scores if it chooses to. But FHA itself only has a maximum requirement of 43% DTI for borrowers with those credit scores. It also does not have a front end debt to income ratio cap. Most lenders will have a front end debt to income ratio cap of 31% DTI.
  • To be approved with a credit score of 620 or more, your maximum front end DTI is 46.9%. The maximum back end DTI is 56.9%. The latter is all of your total monthly debt payments divided by your gross monthly income.
  • Some FHA lenders may have overlays for 2017 where they may cap the debt ratio at 45% to 50% DTI.
  • DTI ratio caps on any manual overwriting cases can go over 50% DTI, if the borrower has more funds to put down or other compensating factors.

Remember, each approved FHA lending sources has its own standards on income and debt. If you are turned down by one lender, we recommend that you try another. Read more about how to qualify for FHA loans.

The Bottom Line

FHA loan income requirements remain very forgiving in terms of debt, income, credit and down payment, even if the standards are a bit tighter today. Shop around with various lenders and see if you can get approved.

 

FirstTimeHomeFinancing.com provides a news and information service by offering editorial content related to the housing and mortgage industry. FTHF has no affiliation FHA or any other government agency. This site does not guarantee FHA loan income requirements with all government lenders. This website is not responsible for the accuracy of information or responsible for the accuracy of the rates, APR or lending guidelines posted by advertising banks, lenders and brokers.

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