FHA home loans are incredibly popular, especially with first-time home buyers. One of the biggest reasons these loans are popular is that they have different requirements than traditional mortgage loans. The looser requirements are designed to lower the barriers of entry for homebuying and make homeownership more accessible to more people.
What Are FHA Loans?
FHA loans are those backed by the Federal Housing Administration (FHA). This program was created to address the widespread and devastating foreclosures during the Great Depression. It provides lenders with insurance so they feel confident offering financing to people with less-than-perfect credit.
You don’t have to be a first-time homebuyer to qualify for an FHA loan, but many individuals who seek these loans are. The big reasons these loans are popular are that:
- Homebuyers can make a down payment as low as 3.5% for credit scores that are at least 580. Those with a credit score between 500 and 579 can still qualify if they provide a 10% down payment. This is much less than the 20% generally required for traditional mortgage loans. Many families or individuals may struggle to save a 20% down payment, while 3.5% – or even 10% – is much more attainable.
- Homebuyers don’t need a perfect credit record. Since the Federal Housing Administration insures FHA loans, banks aren’t taking a huge risk when they provide these mortgages, which also means that they don’t have the same requirements related to credit records. Individuals with credit scores as low as 500 can still qualify for an FHA loan.
While these features of FHA loans make homeownership more achievable for many residents of the United States, there are several other requirements when you try to secure an FHA loan, including:
- The borrower must be able to prove steady employment, generally for at least the last two years.
- The borrower must be a lawful resident, have a valid Social Security number, and be of legal age to secure a mortgage.
- New loans are only for primary residences.
- Borrowers must have a completed property appraisal from an FHA-approved appraiser.
And while these requirements are usually relatively easy to meet, the loans also have income requirements that are very different from other types of mortgage loans.
What are the FHA Loan Income Requirements?
There are several aspects of income requirements that borrowers must meet in order to qualify for an FHA loan. The first is related to the front-end ratio. This calculation examines the total mortgage payment, including property taxes, mortgage insurance, and homeowners insurance. This must be less than 31% of the borrower’s gross income for FHA loans. Some borrowers may get approved with a front-end ratio as high as 40%, but they must justify why the mortgage still represents an acceptable risk.
FHA loans also consider the debt-to-income (DTI) ratio, which may also be called the back-end ratio. This is the percentage of your gross income used to pay your debts, including the mortgage, student loans, automobile loans, credit card debt, and child support. The higher a DTI is, the more likely it will be that the individual may struggle to pay all of the bills. Borrowers with a DTI ratio of 50% or less are more likely to qualify for an FHA loan than borrowers with a DTI ratio of more than 50%. With conventional mortgages, lenders often require that borrowers have a DTI of 36% or less. Usually, borrowers seeking an FHA loan with a DTI of 43% or less will qualify for the loan without any additional information required. In comparison, those with a DTI between 43% and 50% may qualify if they can provide adequate justification that the mortgage presents an acceptable risk.
Aside from these income ratios, FHA loans have no required minimum income level. However, there are borrowing limits for FHA loans. These limits vary by county, but it is generally up to $472,030 for single-family homes in low-cost areas and $1,089,300 for high-cost areas. Borrowers must also be able to provide documentation of steady income for at least two years leading up to the loan application.
As you can see, FHA loan income requirements are much less restrictive than other mortgage loans. They allow lower credit scores, minimum down payments, and looser income ratio restrictions. These are all reasons why FHA loans are popular for individuals and families trying to buy their first home. For more information about FHA loans, contact 7th Level Mortgage 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.