Almost anyone who wants to buy a home is able to, thanks to a variety of mortgage programs available for different types of borrowers.
Even those who can’t fathom saving up a 20% down payment can still purchase a home that they love, thanks largely to FHA loans. FHA loans allow borrowers to put as little as 3.5% down. But FHA loan income requirements and qualifications look a little bit different from other mortgage programs.
So what is required for taking out an FHA mortgage loan? Keep reading below to see how you can purchase your dream much sooner than you thought was possible.
What are FHA Loans?
FHA loans are not loans given by the Federal Housing Administration (FHA). Rather, they are loans provided by traditional mortgage lenders and banks insured by the FHA.
The government backing on these loans helps lenders provide loans to riskier borrowers without taking on the additional risks themselves.Borrowers putting less than 20% down will also need to pay a mortgage insurance premium each month.
This translates to a more lenient borrowing process, where both down payments and credit scores can be lower. This is especially helpful for first-time homebuyers who aren’t selling a home and using their equity to purchase their next property.
FHA Loan Income Requirements
FHA loans are great financial tools, opening the door to homeownership for many people. But what does it take to qualify for a loan backed by the FHA?
One of the most important factors is your income; how much you make, what type of work you do, and how long you’ve been doing it.
The FHA doesn’t require a set income amount in order for you to qualify for an FHA loan, and there is no minimum or maximum income that would qualify you or disqualify you from an FHA loan.
But you do need to have verifiable income. The easiest way to prove you make enough money is by providing your pay stubs.
Lenders generally require borrowers to have a steady income for at least two years in the same line of work. So if you recently started a job in a new industry, it’s best to wait until you have two years of pays tubs before applying for a mortgage.
You’ll also need to consider your debt-to-income ratio (DTI). This is how much money you spend each month on debt repayment versus how much income you have.
So if you make $4,000 per month, but pay $1,000 per monthto make payments on an auto loan, a student loan, and a credit card, then your debt-to-income ratio would be 25%.
FHA loans will typically require borrowers to have a DTI under 50%. The lower your DTI, the better. Less debt might allow you to get a larger mortgage, giving you more options when selecting a home.
FHA Loan Credit Score Requirements
Income isn’t the only factor when you take out a loan for a home. The other big component is your credit score. Your credit score shows how trustworthy you are as a borrower. The higher your score, the more likely it is you’ll get a loan, and the lower your interest rate will be.
The FHA requires a minimum credit score of 500 to secure a loan.
However, if you would like to put just 3.5% down, you’ll need a credit score of at least 580. Anything less than 580 will require you to put 10% down.
And while the FHA allows for borrowers with a score as low as 500 to be considered for the program, individual lenders may set their own credit limits. If you have a new or low credit score, you may need to shop around for lenders who can work with your situation.
FHA Down Payments
With FHA, most borrowers put down between 3.5% and 10%, depending on their credit score.On a $200,000 home, that is between $7,000 and $20,000.
The down payment needs to come from an approved source, meaning that a lender needs to verify where the money came from. This can be from the borrower’s own cash reserves, or it can be from the sale of any investments they have.
Alternatively, the down payment can come in the form of a gift from a relative or friend or even an employer or charitable organization. However, the funds need to be a true gift, and there cannot be any expectation of repayment.
You cannot receive gifted funds from anyone who may have a financial interest in the property or in your mortgage loans, such as the builder, your real estate agent, or the property seller.
Along with the down payment, borrowers typically need to front closing costs when buying a home. These costs pay many of the costs involved in processing the loan, such as loan origination fees, appraisal fees, title searches, and more.
Typically, closing costs amount to 3% to 6% on the purchase price of the home. With conventional mortgages, these costs need to be paid upfront. But with an FHA loan, many of these expenses can be rolled into the loan.
Private Mortgage Insurance
Lastly, borrowers need to be aware of private mortgage insurance (PMI), which is an additional monthly fee required for borrowers putting less than 20% down. This helps to alleviate the risk a lender takes on when providing a mortgage with a low down payment.
For your new loan, you’ll pay 1.75% of the total loan cost upfront, though this can be rolled into the mortgage. You’ll need to pay about 1% of the loan amount per year in monthly installments.
So if your original FHA mortgage is $200,000, you’ll pay around $2,000 per year or around $166 per month in PMI.
Buy a Home and Build Wealth Now
Even though there aren’t any set FHA loan income requirements, there are plenty of other requirements you’ll need to meet to qualify for this incredible program.
It’s designed to help those who can’t meet the requirements of conventional mortgages to ensure everyone has a chance of purchasing a home and building long-term wealth.
Do you need some financial advice and mortgage tips to see which program is right for you? Reach out to us here at 7th Level today to see how our mortgage specialists can help you buy your dream house much sooner rather than later.
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.