Mortgage guidelines today are much different than years’ past. Today you have to verify and re-verify everything you provide for qualification purposes. Lenders will not assume anything for fear of the mortgage crisis occurring again. Because of this, mortgage lending tightened up quite a bit, but the FHA has set out to make it a little easier for consumers to purchase or refinance their home. Their lightened up guidelines are still strict enough to prevent any fraudulent activity, but light enough to allow people from all walks of life to get into a home.
FHA Income Guidelines
The one area FHA loans are much more flexible than other programs is in regards to your income. Yes, you need consistent income that you can prove you received for 2 years, but there are exceptions to that rule.
- Overtime Income – Money you make working overtime has seen an on again/off again relationship with many mortgage programs. Today, the FHA allows you to use the income for verification purposes. The only requirement is that you can prove that the income is consistent. This means it cannot be a one-time or one-period deal. If you consistently work overtime for 2 years (in some cases 1 year will suffice), then you can use the income as part of your qualification income. Your employer must be able to verify not only the receipt of the income but also that it will continue in the future, though.
- Part-Time Income – Income you receive for working less than 40 years can help you qualify for an FHA loan as well. As with overtime income, you must show receipt of the income for 2 years in a consistent manner. This could mean that you worked 12 hours per week for the last 2 years or that you worked September through December for the past few years – the key is consistency.
- Raise – If you received a raise in the last year, you can use it for qualifying purposes on your FHA loan. You have to wait until you receive that 12th payment with the raise in order for it to qualify. As with all other types of income, it must be consistent as well. If the raise is on your full-time income, it should be simple to verify its consistency.
- Self-Employment Income – Self-employed borrowers go through more difficulty qualifying for a loan than other borrowers, but the FHA makes it easy as long as you have proof of self-employment income for the last 2 years. The exception to this rule, however, is if your self-employment income declined during that time. If you have a significant decline (more than 20 percent), you will have to wait until your income picks up again so that you can prove your ability to bring your business back up.
More than One FHA Loan
In the past, you could only have one FHA loan at a time, no exceptions allowed. Today, the FHA changed the requirements slightly. You can now have two FHA loans if your job relocates you and you need to move quickly. The rules to this new requirement include:
- Your new job must not be within a reasonable distance from your current home. If commuting from your current residence would prove to be difficult, then a second FHA loan might be a possibility while you try to sell your current home.
- You cannot get the second loan based solely on time, however. The FHA measures the distance of your new job from your current home, not the length of time it takes you to drive it. For example, if you live in Chicago where traffic is heavy, you cannot use that as an excuse to move closer to the new job unless the distance you must drive is extraordinary.
- The general distance required is 100 miles, but there are variations to the rule depending on the area you live.
FHA Debt Ratio (DTI) Guidelines
FHA loans are known for their debt ratio flexibility. They do not have hard and fast rules like conventional loans, allowing for more flexibility and explanations on higher debt ratios. It is important to know, however, that the FHA requires your deferred loan payments on student loans to be included in your debt ratio. This is a good rule to have, however, because it allows you to know what your future holds when your deferred payments are no longer deferred. Prior to this year, you could exclude those payments from your debt ratio, which helps for qualification purposes, but in reality, it makes things much more difficult as you try to figure out your finances when the new payment starts.
The FHA loan offers a variety of benefits that other loans do not offer. Even if you are not a first-time homebuyer, you can apply for FHA financing if its benefits will help you in your quest to be a homeowner. If you get turned down for a conventional loan, or if you do not have 20 percent to put down on a home, FHA loans are a great alternative that provides low rates, easy to qualify for guidelines, and low costs, making home ownership a reality for many people today.