Federal Housing Administration (FHA) loans are incredibly popular mortgage options. For low-to-middle-income earners, FHA loans make a mortgage more accessible because the government backs your mortgage.
FHA loans allow you to buy even if you do not have perfect credit. You can also put down less money upfront. However, you get these benefits only when you meet specific requirements.
One of the demands you must meet is the FHA loan income requirements. The good news is that your income only matters when applied to your debt. Here are what buyers need to know about the 2020 income requirements for an FHA loan.
What are the Income Requirements for an FHA Loan?
You need an income to get a traditional mortgage. What rules apply when you want a government-backed loan?
The good news is that the FHA does not publish a minimum or maximum income requirement. You cannot earn too little or too much, at least in terms of the FHA’s advice.
All you need to do is have a steady income and be able to provide proof of it.
That is good news, particularly if you are a first-time buyer. These programs typically cater to a specific income level established by the Department of Housing and Urban Development (HUD). If you make too much, you get locked out of these helpful programs, even if you do not earn enough to save for a deposit and closing costs.
Why does not the FHA care about the amount you earn? Contrary to popular belief, an FHA loan is not a first-time buyer loan. FHA-insured mortgages are for everyone. The product just happens to make life easier for first-time buyers.
Are There Limits on What You Can Borrow?
The FHA does not care if you earn $60,000 or $600,000. Are any limits at all?
Yes, there are upper limits, but they apply to house prices rather than your income.
Every year, the FHA places a mortgage limit on the amount you can borrow. The limits depend on your county or Metropolitan Statistical Area to account for the considerable differences in house prices in different areas.
With an FHA mortgage, you can borrow up to 115% of the median price as determined by HUD. The FHA’s national mortgage floor and ceiling for a single-family home in 2020 are:
- Floor: $331,760
- Ceiling: $765,600
You can find your FHA mortgage limits using HUD’s search tool. You can also find the FHA loan limits for New Jersey here.
Where Does Your Income Impact Your FHA Loan?
While there is no income floor or ceiling, the amount you earn still impacts your ability to borrow. The FHA requires you to have a debt-to-income ratio of 50% or less.
What is a debt-to-income ratio? It is your total monthly debt payments divided by your gross monthly income. In other words, the ratio looks at how much money you have left after you pay your bills.
You might remember a lower number from the past. However, Fannie Mae raised the income limit to 50% in July 2017. The truth is that lenders still look for 43% or less when they hand out Qualified Mortgages.
The debt-to-income ratio is important because it ensures that lenders follow what is called the ability-to-repay rule. After 2008, the federal government forced lenders to take accountability for the loans they give out. To stop another crash, lenders now need to genuinely consider and make a reasonable determination that borrowers can repay the loans.
A high debt-to-income ratio before applying may signal problems with repaying your mortgage down the road. Additionally, if the mortgage you want triggers a high debt-to-income ratio, you may also be denied.
How Do You Improve Your Debt-to-Income Ratio?
If you do have a debt-to-income ratio of over 50%, then you have work to do before you start the approval process. For most people, the action revolves around paying down debt. However, raising your income will also do the trick.
Even still, you do not necessarily want to apply for a loan with a debt-to-income ratio that high. Even though FHA mortgages have less stringent requirements, it is ultimately up to the issuing bank to decide whether to grant you the mortgage. You might not get the most favorable rates. Plus, taking out a mortgage that you might struggle to afford could put you at risk of defaulting on the loan. Defaulting and foreclosure can come with severe consequences and make it difficult to buy again.
At the same time, the increased debt-to-income ratio acknowledges that homeownership is significantly cheaper than renting. It can be tough to pay down debt when you must make do with exceptionally high rent. As a result, the 50% limit gives some wiggle room if you need to get out of an expensive rental market to make a meaningful impact on your debt.
Are There Any Other FHA Loan Income Requirements?
In addition to having an income and managing your debt, there are a few other FHA loan income requirements.
- Being up to date with tax payments or judgments
- Paying a past FHA-insured mortgage on time
- Having at least two credit accounts (personal loans, car loans, credit cards, etc.)
If you receive a gift to help you with a down payment, you also need to declare it. The donor needs to explain their donation and sign and date it.
These requirements represent the basics, but each lender may have its list of documentation or specifications.
Is an FHA Loan Right for You?
FHA-backed loans allow you to buy a property without perfect credit or 20% down. In today’s world, the option makes it easier to buy a home and start building equity and a better financial position for you and your family.
The good news is there are no income requirements for an FHA loan. Instead, there are limits on your debt-to-income ratio and the amount you can borrow. Even still, both of these are generous. With the right broker, you can find the loan you need to buy your next home.
7th Level Mortgage is a leading one-stop mortgage company providing deeply informed, custom-tailored assistance with every phase of each mortgage transaction. If you are searching for a home loan in New Jersey, Pennsylvania, Virginia, 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.