FHA Mortgage Earnings Necessities: Full Information
If you are looking for a home of your own, you may have heard of the FHA mortgage loan. If so, you are probably curious about what an FHA home loan has to offer. Here we cover everything you need to know about FHA loans including:
- FHA Loan Income Requirements
- Comparing an FHA Loan to a Traditional Mortgage
- The creditworthiness that is required to get an FHA mortgage
- How the FHA Loan Program Can Work for You
What’s in an FHA Mortgage?
An FHA loan is guaranteed by the Federal Housing Administration (FHA). Unlike a traditional loan, if you fail to make your monthly payments, lenders know that the Federal Housing Administration will step in and pay them out. That is the main reason an FHA mortgage lender has a milder set of credit requirements for FHA borrowers. They know their money is safe thanks to the FHA guarantee.
The FHA guarantees loans up to a certain amount, and that amount is determined by the zip code. Depending on your circumstances, you may be able to borrow more than the FHA loan limit, but this will require you to invest more money.
How do the FHA interest rates compare to other types of loans?
When deciding between an FHA or VA loan, you might be surprised how competitive the FHA rates are. At this point in time, for example, FHA and conventional lending rates are going head to head. And the VA loan (guaranteed by the Department of Veterans Affairs) has a slightly lower interest rate.
Because FHA mortgage rates are competitive compared to other types of mortgages, more detailed factors such as your creditworthiness and the size of your down payment can help you decide which mortgage to apply for.
How Much Do I Have to Earn to Qualify for an FHA Loan?
The FHA has no minimum income or a maximum income limit. The important thing is how constant your income is and whether you will be able to make payments for the foreseeable future. For this you need proof of income.
What counts as proof of income?
The FHA is looking for borrowers with proof of a steady income. This includes documentation such as:
- Current pay slips
- A new W-2
- Current investment calculations
- Annual tax returns
The source of income is less important than the stability of income. Your income can come from a traditional job, owning a business, part-time work, welfare, retirement income, or investment income. Regardless of the source, an FHA lender wants to know that you will continue to receive the same gross monthly income (pre-tax) for the foreseeable future.
While the FHA doesn’t require you to be on the job for any specific length of time, you do need to explain any employment gaps that span one or more months. For example:
- If you recently quit the military: Your FHA-approved lender may ask you to see your discharge papers.
- If You Left Your Job To Quit College: The FHA Lender May Ask You To See Your Transcripts.
If you change jobs frequently within the same industry, an FHA insurer will likely rate your loan application positively as long as your income has remained constant or has increased.
What is the minimum creditworthiness required for an FHA loan?
Whether you’re a first-time home buyer applying for an FHA loan or have already bought a dozen homes, you must meet a minimum credit score to qualify. The required credit rating is 580 or higher. However, if you can pay a 10% deposit, a lender may accept a score in the 500 to 579 range.
What is the minimum deposit?
An FHA mortgage requires a minimum down payment of 3.5%. That can come from:
- Cash from personal checking and savings accounts
- Cash saved at home
- Private savings clubs
- Savings bonds
- 401 (k) accounts
- Deposit gift credit
What is PITI and why is it important?
PITI stands for “Principal, Interest, Taxes, and Insurance”. These are the four main expenses that go into your monthly payment.
This is how it collapses:
- Principal: The amount you are borrowing
- Interest: The interest due on the loan
- Taxes: property taxes levied on the property
- Insurance: Household contents insurance to protect the property
What is MIP and why do I have to pay for it?
Another FHA loan requirement is the Mortgage Insurance Premium (MIP).
You actually have to pay for this in two ways:
- Upfront MIP: You pay this at the time of closing. It corresponds to 1.75% of the loan amount.
- Annual MIP: This annual amount is divided by 12 and added to the monthly mortgage payment. It is 0.45% to 1.05% of the loan amount, depending on how much the borrower leaves behind the property.
This FHA mortgage insurance allows the FHA to continue to guarantee loans.
Is the Debt to Income Ratio a Big Deal?
As part of the loan approval process, an FHA approved lender will assess how much you owe relative to your earnings. This is known as your debt-to-income ratio, or DTI.
The calculation works like this: the lender divides your total monthly expenses by your gross monthly income to determine how much of that income is being talked about. Let’s say your total monthly debt is $ 2,000, including a mortgage, car payment, personal loan, and credit card. Let’s say your monthly income is $ 5,000. To get your DTI, divide $ 2,000 by $ 5,000 to get 0.40, or 40% ($ 2,000 ÷ $ 5,000 = 0.40).
While acceptable debt ratios vary by loan type, many conventional loans do not allow borrowers a DTI greater than 36%. The standard FHA guidelines allow 43% but sometimes allow a higher DTI depending on several factors that we’ll cover next.
Are there any exceptions with DTI?
If any of these factors play a role, an FHA lender can allow you to carry a DTI of up to 59.6%.
- Residual Income: If you have significant funds to spare after paying bills each month, a lender can see that there is a good chance that you will make your mortgage payments.
- Cash reserves: If you have a sizeable emergency fund, you are less likely to have a lender worry about getting into financial trouble and being unable to pay your mortgage.
- Minimal Payment Shock: When the payments for your new home are close to your previous rental or mortgage payments, it is easier for an FHA mortgage lender to believe that you can change the monthly payment for the property you are trying to buy.
- High Credit: If your credit score is excellent, an FHA lender has reason to believe that you will make your monthly mortgage payment and protect your credit score.
- Permanent Employment: A history of job and income stability shows that you are less likely to move from one job to another, which puts your ability to pay the mortgage at risk.
What is the closing cost of an FHA mortgage?
Once you make it to the closing table, plan to spend between 2% and 5% of the loan amount on closing costs. Closing costs are the fees you pay at the time the title of property is handed over to you. It’s when you become the official homeowner.
Your actual cost will be determined by several factors, such as:
- The loan amount
- Your creditworthiness
- Lender’s Fees
When you consider the ease of applying for an FHA mortgage, the low FHA mortgage rates, and the ability to buy a home with as little as 3.5%, it is possible that you will decide that it is the right type of loan for you .