There are many speculations regarding what an FHA loan requires in terms of income. Some people believe that this loan program is strictly for the “lower income” borrowers and that those that make too much will not qualify. This is simply not true – there is no maximum amount of money you can make that would disqualify you for FHA financing. Just like any other loan, the requirements for FHA financing include having the appropriate credit score, a low-enough debt ratio, and a steady job. When it comes to your income, here are three requirements you must meet.
Consistency of Income
The biggest concern for any FHA lender is the consistency of your income. If it is not consistent, you will not be able to qualify for an FHA loan. They want to see that your job produces steady income that you receive on a regular basis. There are exceptions to this rule that might allow you to still qualify for FHA financing, but you have to be able to annualize your income and still make it work. For example, if you work on a commission basis and you make a majority of your money during the second half of the year, with the first half being pretty slow, you would have to take the total amount of money you make for the year and divide it by 12. What this means you cannot do is apply for a mortgage during the second half of the year when your income is the highest and assume that a lender will approve you. He will need to account for the slower parts of the year, ensuring that you have enough money to make your mortgage payments during that time.
Another thing that goes along with consistency in your income is the length of your employment. You can have consistent income, but constantly change jobs. This might not fly with the lender. It depends on the exact circumstances, though. For example, if you keep getting fired, yet finding new jobs, chances are your income will not be considered consistent. On the other hand, if you changed jobs several times because of promotions, better opportunities, or you underwent training or went back to school to better yourself, you might be able to use your income despite its slight inconsistencies.
Adequate to Meet Monthly Debt Obligations
Your income must also be adequate; how adequate depends on your exact circumstances. It needs to be enough to cover not only your principal and interest payment, but also the amount of your real estate taxes, homeowner’s insurance, flood insurance, and FHA mortgage insurance. It also needs to be enough to cover your other monthly debts, whether that means student loans, car payments, personal loans, or credit cards. Your gross monthly income cannot just be enough to cover those amounts, though. The FHA wants to see that only 31 percent of your gross monthly income is used to pay your total mortgage payment and 43 percent of your gross monthly income is used to pay all of your debts, including the total mortgage payment and the other debts. This leaves your residual income, as it is called, to put into savings and to pay for the daily cost of living. If your debt ratio is too high, it can become difficult to afford your bills, including your mortgage, putting you at risk for default. This is why your income needs to be adequate based on your situation.
Verifiable
Last, but not least, your income must be verifiable. This means that you do not just say that you make $100,000 per year, but that you can prove it. Proving it is a little more than providing paystubs. Where you work will depend on what you have to provide. For example, if you are employed by someone and paid a salary, you will probably only have to provide:
- 2 most recent paystubs
- The last 2 years’ W-2s
- Name and phone number of a person at the company that could verify your employment
If you work on a commission basis for an employer, you will have to provide a little more:
- 2 most recent paystubs
- The last 2 years’ W-2s
- The last 2 years’ tax returns with all schedules
- Name and phone number of a person at the company that could verify your employment
If you are self-employed, you will have to provide:
- The last 2 years’ tax returns with all schedules
- A P&L from the company
- A letter from the CPA that does your taxes stating that you are self-employed and that there are no other owners
- The last 12 to 24 months’ worth of bank statements
- An executed IRS Form 4506
In the case of a person that is employed by someone else, the lender will verify your employment with them either in writing or over the phone. If you are self-employed, the verification is done by an unbiased 3rdparty, such as the CPA. This is how FHA lenders determine that your income is for real and is not fabricated in order for you to qualify for an FHA loan. It is the lender’s job to determine not only that you make the income, but also that it is likely to continue for at least the next 3 years.
Your income plays an important role when you want to qualify for an FHA loan. The more evidence that you can provide to a lender that your income is steady and likely to continue; the more likely you will be to get approved for the loan. Even if you have part-time or seasonal income, if it is consistent and you have received it for at least the last two years, you might be able to use it for qualifying purposes. Talk to a lender about what you can afford and how your income plays a role in your approval to seen what type of financing you could get to purchase or refinance your home today.
