Government loan programs each have their own requirements, some of which include income limits. FHA loans, though, are not a part of that rule. In other words, there’s no rule regarding how much money you can make. It’s not possible to make ‘too much money’ and not qualify for the loan.
There is such a thing as not making enough money to qualify for an FHA loan, though. We help you understand what you need below.
FHA Loans are Flexible
FHA loans have some of the most flexible underwriting guidelines available today. For starters, you only need a 580 credit score. That’s the lowest minimum credit score requirement out of any loan program today. A 580 credit score would not make you eligible for a conventional, VA, or USDA loan, to give you a little frame of reference.
FHA loans also allow slightly higher debt ratios than conventional loans and USDA loans. VA loans are in another category because the VA doesn’t put a lot of emphasis on the debt ratio. Instead, they focus on the veteran’s disposable income. The FHA allows a housing ratio of 31% and a total debt ratio between 41% and 43%.
The housing ratio is the comparison of the total mortgage payment versus your gross monthly income. Your total mortgage payment includes your principal, interest, taxes, homeowner’s insurance, and mortgage insurance. Your payment cannot take up more than 31% of your gross monthly income. Your total debt ratio is the housing payment plus any existing monthly debt that you carry. This ratio shouldn’t be more than 43% of your gross monthly income on the high side.
The More Money You Make the Better Your Chances of Approval
The more income you have on a monthly basis, the better your chances of approval become, especially if you have a credit score on the lower end. Lenders look for compensating factors when they consider an applicant with a ‘bad qualifying factor’ such as a 580 credit score.
You have to understand that the FHA doesn’t underwrite or fund the loans. The FHA approved lenders do this. This means it’s the lenders’ money on the line. The FHA does guarantee the loan for lenders. This means that they promise to pay the lender back ‘some’ of the money they lose when a borrower defaults. There’s still the risk of loss, though. This is why the lenders want compensating factors, such as higher income/lower debt ratio.
Maximize Your Qualifying Factors
If you need an FHA loan, it’s likely because you can’t qualify for a conventional loan. Whether it’s because you don’t have at least a 5% down payment, your credit score isn’t high enough, or your debt ratio is too high, you have an option with FHA loans. But, lenders want you to have compensating factors for any negative factor that you bring to the table.
We already discussed the lower credit score above. Lenders want to know that you at least make a good living and aren’t in over your head in debt. It also helps if you have a decently sized down payment or an exceptional employment history.
You should take a step back and look at your qualifying factors. What is the reason that you need the FHA loan? You will pay mortgage insurance for the life of the loan, so it shouldn’t be your first choice if you qualify for conventional financing. So what is that’s holding you back from conventional financing? Make that your only ‘negative’ factor. In other words, make everything else look great.
Lenders look at the big picture when determining your eligibility for an FHA loan. There’s no such thing as making too much money for an FHA loan. But you do need to make sure you have decent qualifying factors all around the board to make an FHA approved lender want to give you a loan.