FHA Income
Guidelines
FHA Income Guidelines
In order to qualify for an FHA loan, an underwriter must analyze all income to ensure that it is sufficient
to cover the mortgage and other obligation of the borrower. The stability and likelihood of continuance
must also be analyzed as best as possible. Income from any source that cannot be verified, is not
stable. Income that will not continue may not be used in calculating the borrower’s income
ratios.
All of this
is done to help lessen the possibility that the borrower will default on the mortgage obligation. Borrowers
that are over exteneded or have unstable income may have to wait to purchase until a future time when their
finances are in better shape.
DEBT RATIOS:
Debt Ratios are the relationship between ones income and ones expenses. To meet FHA Income Guidelines, ratios
are generally expressed as two numbers like 31 over 43 or 31/43. The first number, the 31, represent the
relationship between the borrowers income and his new housing expense of principal, interest, taxes, insurance and
homeowner dues. A borrower who makes $3,000 per month and has a housing expense of $930 would have a 31% top
end ratio.
The other number of 43% represents the total monthly debt, including the housing expense and all other debt such
as credit cards, loans, child support, etc. Thus in our example of the borrower that makes $3,000 per month and had
a total expense of $1,290, would have a 41% bottom ratio.
With the use of FHA automated approvals, a borrower’s ratios can sometimes exceed the guidelines above and may
go has high as 50%. Also, with additional compensating factors a borrower may be able to exceed the ratio
guidelines. However, borrowers with higher debt ratios will be looked at extremely carefully. They
should generally have some other positive factors such as large reserves to help ofset this higher risk.
STABILITY OF INCOME:
HUD does impose an arbitrary minimum length of time a FHA borrower must have held a position to be eligible.
However, the FHA lender must verity the borrower's employment for the most recent two full years. If a borrower
indicates he or she was in school or in the military during any of this time, the FHA borrower must provide
evidence supporting this such as college transcripts or discharge papers. The borrower must also explain any gaps
in employment of a month or more. The point here is to make sure that the income is likely to continue and
that the income is stable or increasing.
Allowances for seasonal employment, such as is typical in the building trades, etc., may be made.
The FHA lender or underwriter is looking to show a steady source of constant earnings. Borrowers with frequent
job changes generally show a lack of stability. Also, large swings or changes in income will also lead an
underwriter to question the stability of the income. A borrower who changes jobs frequently within the same line of
work, but continues to advance in income or benefits should be considered favorably as they are probably advancing
their career.
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