FHA Loan Income Requirements

If you're in the market for a home, you may have heard of the FHA mortgage loan. If so, you're probably curious about what an FHA home loan has to offer. Here, we'll cover everything you need to know about FHA loans, including:

• FHA loan income requirements
• How an FHA loan compares to a conventional mortgage
• The credit score required to land an FHA mortgage
• How the FHA loan program can work for you

What is in an FHA mortgage?

An FHA loan is guaranteed by the Federal Housing Administration (FHA). Unlike a conventional loan, lenders know that the Federal Housing Administration will step in and pay them if you fail to make your monthly payments. That's the primary reason an FHA mortgage lender has a more lenient set of loan requirements for FHA borrowers. They know their money is safe due to the FHA guarantee.

The FHA guarantees loans up to a specific amount, and that amount is determined by zip code. Depending on your circumstances, you might be able to borrow more than the FHA loan limit, but it would involve putting more money down.

How do FHA interest rates compare to other types of loans?

If you're trying to decide between an FHA or VA loan, you may be surprised to know how competitive FHA rates are. As of this writing, for example, FHA and conventional loan rates are running neck and neck. And the VA loan (guaranteed by the Department of Veterans Affairs) has a slightly lower interest rate.

Since FHA mortgage rates are competitive compared to other mortgage types, you can decide which mortgage to apply for based on more detailed factors, like your credit score and how much you have for a down payment.

How much do I need to earn to qualify for an FHA loan?

The FHA doesn't have a minimum income or a maximum income limit. What's important is how consistent your income is and whether it looks like you can make payments for the foreseeable future. You'll need proof of income for that.

What counts as proof of income?

The FHA looks for borrowers with proof of steady income. This includes documentation like:

• Recent pay stubs
• A recent W-2
• Recent investment statements
• Annual tax returns

The source of income matters less than the stability of income. Your income may be earned through a traditional job, owning a business, part-time work, public assistance, retirement income, or investment income. Whatever the source, an FHA lender wants to know that you will continue to receive the same gross (pre-tax) monthly income for the foreseeable future.

While the FHA doesn't require you to be on the job for a particular period of time, it does require that you explain any gaps in employment spanning for one or more months. For example:

• If you've recently left the military: Your FHA-approved lender may ask to see your discharge papers.
• If you left work to finish college: The FHA lender might ask to see your transcripts.

If you frequently change jobs within the same line of work, an FHA underwriter will likely consider your loan application favorably as long as your income has remained steady or increased.

What is the minimum credit score required for an FHA loan?

Whether you're a first-time home buyer applying for an FHA loan or you've purchased a dozen houses before, you'll need to meet a minimum credit score to qualify. The credit score required is 580 or higher. However, if you can make a 10% down payment, a lender may accept a score in the range of 500 to 579.

What is the minimum down payment?

An FHA mortgage requires a minimum down payment of 3.5%. This can come from:

• Cash from personal checking and savings accounts
• Cash saved at home
• Private savings clubs
• Savings bonds
• IRAs
• 401(k) accounts
• Investments
• Down payment gift funds

What is PITI, and why does it matter?

PITI stands for "principal, interest, taxes, and insurance." These are the four primary expenses that go into your monthly payment.

Here's how it breaks down:

• Principal: The amount you borrow
• Interest: The interest due on the loan
• Taxes: Property taxes assessed on the property
• Insurance: Homeowners insurance to protect the property

What is MIP, and why do I have to pay it?

Another FHA loan requirement is mortgage insurance premium (MIP).

You'll actually need to pay this in two ways:

• Upfront MIP: You'll pay this at the time of closing. It equals 1.75% of the loan amount.
• Annual MIP: This yearly amount is divided by 12 and added to the monthly mortgage payment. It is 0.45% to 1.05% of the loan amount, depending on how much the borrower puts down the property.

This FHA mortgage insurance allows the FHA to continue guaranteeing loans.

Is debt-to-income ratio a big deal?

As part of the loan approval process, an FHA-approved lender will consider how much you owe in relation to how much you earn. This is called your debt-to-income ratio, or DTI.

The calculation works like this: The lender divides your total monthly expenses by your gross monthly income to determine how much of that income is spoken for. Let's say your total monthly debt is $2,000, including a mortgage, car payment, personal loan, and one credit card. And let's say your monthly income is $5,000. To get your DTI, divide $2,000 by $5,000 to get 0.40, or 40% ($2,000 ÷ $5,000 = 0.40).

While acceptable debt ratios vary by loan type, many conventional loans don't permit borrowers to have a DTI higher than 36%. Standard FHA guidelines allow for 43% but will sometimes permit a higher DTI, depending on several factors we'll cover next.

Are there any exceptions when it comes to DTI?

If any of these factors are in play, an FHA lender may permit you to carry a DTI of up to 59.6%.

• Residual income: If you have significant funds left over each month after you've paid bills, a lender can see there's a good chance you'll make your mortgage payments.
• Cash reserves: If you have a substantial emergency fund, a lender is less likely to worry you'll run into financial trouble and be unable to pay your mortgage down the road.
• Minimal payment shock: If the payments on your new home are close to your previous rent or mortgage payments, it's easier for an FHA mortgage lender to believe you can swing the monthly payment on the property you hope to buy.
• High credit score: If your credit history is great, an FHA lender has reason to believe you will make your monthly mortgage payment and protect your credit score.
• Steady employment: A history of job and income stability shows you're less likely to hop from one job to another, jeopardizing your ability to pay the mortgage.

How much are closing costs on an FHA mortgage?

Once you've made it to the closing table, plan to spend anywhere from 2% to 5% of the loan amount on closing costs. Closing costs are the fees you pay at the time the property title is turned over to you. It's when you become the official homeowner.

Your actual costs will be determined by various factors, like:

• The loan amount
• Your credit score
• Fees charged by the lender

Once you take into account the ease of applying for an FHA mortgage, the low FHA mortgage rates, and the ability to purchase a home with as little as 3.5%, it's possible that you'll decide it's the right type of loan for you.

Still have questions?

Here are some other questions we've answered:

• What Is an FHA Loan?
• FHA vs. Conventional Loan
• FHA vs. VA Loans: What’s the Difference?