31% Housing Ratio:
43% Debt/Income Ratio:
*Annual income needed to achieve respective ratios based on the payment you've calculated.
Be sure to include tax and insurance in your calculations for best results.
Do I qualify for an FHA loan?
FHA loans are a great alternative for first-time and experienced homebuyers alike. While
credit standards and down payment requirements are more generous than conventional mortgages,
not everyone will qualify.
Here's what you need to know.
Complete FHA loan guidelines can be found on HUD's website.
Is FHA even an option?
FHA loans are available in all 50 states and territories like Puerto Rico, Guam, and U.S.V.I. However,
there are limits to how much you can borrow. FHA loan limits are established
annually and typically released each December for the coming new year. Limits are broken down by county,
and your FHA loan amount cannot exceed it. If you spend more than the limit, you'll have to make a down
payment large enough to bring your loan amount down to the maximum.
Loan limits are generally the same for the majority of U.S. counties. However, many areas have higher
costs of living and less affordable housing. FHA designates these high-cost areas as such and adjusts the
county loan limits accordingly. A typical three-bedroom, two-bathroom home in Cedar Falls, IA will
not fetch a price as considerable as one in San Diego. Therefore, the limit is higher, and
those in a high-cost market
are able to make the purchase with an FHA loan.
It's imperative you know your county loan limit BEFORE you start shopping.
Tool: FHA Loan Limit Lookup
Can I meet the down payment requirement?
Mortgage lenders love borrowers who are able to make 20% down payments, but think about how long it
would take for a family of four living on $70,000 per year to save $40,000 to buy a modest $200,000 home.
FHA was created to solve this very problem. Wages (income) have not accelerated with the pace of home
prices. FHA's 3.5% minimum down payment is vital to the health of America's residential real estate market.
Do I have at least 3.5% of my purchase saved for a down payment?
If not, don't fret. We'll get to down payment gifts in a bit. For now, expect your lender to verify
you have your down payment saved and ready to go. You'll be asked for bank statements confirming the funds
are yours. If the money is a result of a large deposit, expect to identify where it came from. The minimum
amount you'll need is 3.5% of the purchase price. Remember, you'll have closing costs
if the seller hasn't agreed to pay them
(seller paid closing costs), so your actual cash
out of pocket will likely exceed your 3.5% down payment.
What if I don't have 3.5% for my down payment?
One of FHA's greatest features is the allowance of a financial gift to cover your down payment. Saving is
difficult and takes time. Often, the path to homeownership begins with a parent or family member's
generosity. It's important to note the gift cannot come from just anyone. Particularly, the gifter cannot be party to the
transaction, such as a real estate agent, builder, or even the seller.
It's also important to note that it must be a GIFT. There can be no implication of expected repayment or
reciprocation. Your lender will advise you on how the exchange of funds and documentation should be
handled, including if the gift is coming from an employer, charitable organization, or someone other than
a family member.
An FHA down payment gift can be a fast-track to homeownership. It's worth exploring if
you do not yet have your down payment saved.
I've made it this far. Do I qualify or not?
There's a lot that goes into obtaining a mortgage loan. FHA is no different. If you're house hunting
in a price range that's less than the county loan limit and you've got your down payment covered, either with
savings or in the form of a gift, we're ready to look at income. You need to have some if you want an
But how much income do you need and where can it come from? This topic can get pretty deep. If you need
to go there, it's best you connect with an
FHA approved lender. We'll cover the gist of
FHA income requirements, but again, an FHA approved lender can determine if your quirky income meets
How much income do I need?
Pardon the vagueness, but there isn't a clear, definitive, or concrete answer or figure.
If you've heard the term debt-to-income (DTI) ratio, this is where it applies. DTI is your total monthly
debt payments divided by your monthly gross income. Debt means debt. It does not include
subscriptions, utilities, memberships, or other recurring payments that are not paying down money you
owe (i.e. credit cards, auto loans, student loans) to creditors. Add all your monthly minimum debt
payments to your new house payment, including property taxes, homeowner's insurance (HOI), and homeowner's
association dues (HOA) and divide it by your monthly income before taxes. This is your debt-to-income ratio.
What should my DTI be?
Most FHA loans are approved by an automated underwriting system (AUS), which factors in your entire
loan application profile. If your profile is strong, your loan might be approved by the AUS even if your
DTI is above the FHA manual DTI guideline of 43%. Additionally, FHA deems a housing ratio (monthly house
payment including taxes, HOI, and HOA divided by gross income) of 31% acceptable. Again,
a strong overall profile with compensating
factors (a term FHA uses for reasons for allowing exceptions) may be approved despite a higher housing ratio.
Confused yet? Don't be. While there is no substitute for getting preapproved,
calculate your FHA loan payment and divide it by the combined monthly gross income
of all borrowers to be on the loan. You'll want that number to be less than 30%. If you have a large
amount of monthly debt, you may have to adjust that number down.
So, if we've learned anything about income and FHA, it's the importance of working with a lender ahead of
time to avoid DTI surprises. A good lender will verify your income and process your application through the
AUS prior to issuing you any kind of prequalification or preapproval letter. You should proceed with caution
if a lender has not verified your income with paycheck stubs, W2s, or, if applicable, tax returns.
We're sorry, but we do not originate mortgage loans, so we cannot preapprove you. However, you can
connect with lenders here.
FHA Credit Requirements
The elephant in the room. Maybe you've heard FHA loans are perfect for the "creditly challenged".
There might be some truth to that, but people who pay their bills will always have a better chance of
being approved for an FHA loan than those who do not.
What if I've had a bankruptcy?
There are two types of consumer bankruptcies, chapters 7 and 13. They differ and thus are handled
differently by FHA.
Let's start with chapter 7. Your discharge date must be more than two years ago.
Additionally, you must have re-established a good credit history.
If your discharge date was less than two years
but more than one year ago, you may be able to qualify if you can demonstrate your bankruptcy was due
to extenuating circumstances and those circumstances are unlikely to return. So, no, a
chapter 7 bankruptcy
does not disqualify you from obtaining an FHA loan, but you must be able to document you've managed your
finances appropriately since it was discharged.
Chapter 13 works a bit differently. You must be at least one year into your payout period with all payments
made on time. You also need written permission from the bankruptcy court to enter a new mortgage agreement.
Similarly, homebuyers in consumer credit counseling are subject to the same contingencies. Like
chapter 7, you must prove you've righted the ship and your finances aren't likely to result in
a future bankruptcy or default.
What about foreclosures?
Three years. You're generally not eligible after a foreclosure or
pre-foreclosure sale until three years after the
foreclosure date. As always, there are extenuating circumstances exceptions (death of primary wage earner,
serious illness), but be prepared to document the scenario and demonstrate your credit was good before
and since. Divorce is NOT considered extenuating, nor is foreclosure resulting from a job transfer
or relocation and not being able to sell your existing home.
Bankruptcies and foreclosures are serious. FHA is sympathetic to difficult times, but you must have
demonstrated responsible borrowing for the required two- or three-year period after the event completion
date. To be clear you should consult with an FHA approved lender to determine eligibility.
All mortgages are nuanced, and every scenario is a bit different regardless of how similar they might
appear. The tools we've created are here to help you plan, budget, and decide which home loan might be
right for you. However, we cannot stress enough the importance of working with a lender right away to
determine which loan program is right for YOU and for how much you might qualify.
There are a gazillion ways to find a mortgage lender, but the best way might be by talking with
friends and relatives who have already purchased homes. Loan officers appreciate referrals and
are likely to treat you with respect and honesty if he/she knows he/she comes highly recommended.
Congratulations on making the leap into homeownership. It's exciting, and we're rooting for you.
If you have questions along the way, ask us. We're here to help.
Good luck on and enjoy your journey.
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