The traditional rule of thumb is to put a 20% down payment towards a house. But with the median starter home price in the U.S. at $313,000, saving that much can seem impossible.
What if there was a way that you only needed to save 3.5% for your down payment? FHA loans can help you buy a house without a big down payment or a perfect credit score. But there are certain requirements you need to meet.
Many people get confused about whether FHA income requirements vary between states and what other guidelines they need to follow.
We’re demystifying the requirements for FHA loans to help you figure out if you may qualify.
Do FHA Income Requirements Vary From State to State?
To qualify for an FHA loan, you don’t need to have a certain income. There aren’t any minimum or maximum income requirements. Because of this, income requirements don’t really vary from state to state.
However, it’s important to note that lenders still look at your income. They want to see if your income is stable and how much you want to borrow compared to your income. The exact requirements for these factors can vary from state to state and from lender to lender.
What Are the FHA Income Requirements?
When applying for an FHA loan, income can be from several different sources. This includes:
- A traditional job
- Self-employment
- Part-time work
- Social Security
- Public assistance
- Retirement or investment income
You’ll need to show proof of your income. You can do this with recent pay stubs, a recent W-2, recent investment statements, or annual tax returns. Showing consistent or increasing income is the goal here.
Your lender is looking for a steady income that will continue for the foreseeable future. Because of this, you may need to explain any gaps in employment that last one or more months.
Your lender will look at your debt-to-income ratio to see if your income is high enough about how much you owe. To find your DTI, your lender will divide your total monthly expenses by your gross monthly income.
For example, imagine your monthly income is $5,000, and your total monthly debt is $2,000. You’ll divide $2,000 by $5,000 to get 0.40 or 40%. This means your DTI is 40%.
DTI guidelines vary between lenders and by loan type. For example, most conventional loans require you to have a DTI lower than 36%. The standard FHA guidelines require a DTI below 43%.
However, there are some exceptions to this rule. In these cases, you may have a DTI up to 59.6% and still be able to qualify for an FHA loan. These factors can include:
- Residual income
- Cash reserves
- Minimal payment shock
- High credit score
- Steady employment
Additional Requirements for FHA Loans
In addition to showing a good ratio of debt to income, you’ll need to meet a few other requirements. One of these is a minimum credit score.
You’ll need a credit score of at least 580 to qualify. Some lenders do require your credit score to be 600 or higher. If you can make a 10% down payment towards the property, your lender may accept a credit score between 500 and 579.
Approval of an FHA loan also requires a minimum down payment of 3.5%. You’ll need to gather this money in the form of cash, either from savings, investments, or gifts. Your lender may want to see proof that you have this in reserve.
As part of your FHA loan, you’ll need to pay a mortgage insurance premium (MIP). This allows the FHA to be able to guarantee loans. There are two parts of MIP, upfront and annual.
At the time of closing, you’ll pay your upfront MIP. This will be 1.75% of the loan amount.
Your annual MIP is divided by 12 and added to your monthly mortgage payment. Each year, you’ll also pay between 0.45% and 1.05% of the loan amount. The exact percentage will depend on how much of a down payment you put down.
How Do You Apply for a Loan?
You can’t just apply for an FHA loan directly with the FHA. The federal government backs the loans, but private lenders offer and service them, just like conventional loans.
If you want to get a loan, the first step is to find an FHA-approved lender. There are many options here, from banks to mortgage brokers to credit unions and online lenders.
You can shop around to find a lender that offers favorable rates as well as a quality experience. Applying for an FHA loan can be confusing, so having the help you need can be crucial.
Once you choose a lender, you’ll need to submit your application, after which you’ll receive a loan estimate.
After this, you can start looking for your home. Keep in mind that there are some requirements for the property you plan to purchase. For example, the home must be your primary residence, and the loan cannot exceed the current FHA loan limits.
Once you find your home, your application will go through underwriting. During this time, you should also schedule a home inspection.
After your application is approved, you’ll be able to schedule the closing and move into your new home!
Purchase Your New Home With an FHA Loan
FHA loans can be a great help when it comes to buying a house. But the process of applying for an FHA loan can be confusing.
It leaves many people wondering things like, “Do FHA income requirements vary from state to state?” Fully understanding the process and finding a lender that can help you through will make buying your home much more pleasant.
If you’re ready to apply for a mortgage,contact 7th Level Mortgage to discuss your financing options today!
7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with each mortgage transaction phase. If you are searching for a home loan in New Jersey, Pennsylvania, Delaware, Maryland, New York, or Florida, please contact us today so that we can determine the best Mortgage Lender to place your loan with and get you the best possible rate and program.