You Must Have Money for a Down Payment

You Must Have Money for a Down Payment

Many government-backed mortgage programs have income limits because the programs are designed for a specific set, such as low-income families. While FHA loans are a part of a government-backed program, they do not have income limits. You can make as much as you want and possibly still qualify for the FHA loan.

It’s not a first-time homebuyer’s loan or a loan for just ‘low income’ families. It’s a loan for anyone that needs flexible underwriting guidelines that may otherwise not be eligible for a conventional loan.

You Must Make Enough Money

While the FHA doesn’t have income limits, it does have requirements you must meet. In other words, you must make enough money to be able to afford the loan payments. The FHA has flexible debt ratio guidelines, but they still put in place the need to make enough money.

Right now, borrowers can have a housing ratio (the mortgage payment versus gross monthly income) of 31%. That means 31% of your monthly income before taxes can go towards your mortgage payment. Borrowers can also have up to a 43% total debt ratio. That means that your total debts, which include the new mortgage payment, credit card payments, and installment loan payments, can take up as much as 43% of your gross monthly income.

If you don’t make enough money to meet those debt ratios, you won’t be eligible for an FHA loan. The FHA won’t provide their guaranty to the lender that they will pay the lender back if you default if you have DTIs higher than the FHA’s maximum.

You Must Have Decent Credit

The FHA also has flexible credit score guidelines. They only require borrowers to have a minimum score of 580. If you compare that to the minimum score required for conventional loans of 680, you’ll see the 100-point difference. That’s quite a difference when it comes to qualifying for a loan.

The FHA also requires lenders to look at your credit history. Do you have timely payments on your debt obligations? Do you keep your outstanding credit in check? In other words, do you avoid overspending on your credit cards just because you have the available credit? Lenders like to see you use no more than 30% of your available credit at any one time. If you use any more than that, it may be considered ‘financially irresponsible.’

Along the lines of income, is the down payment. You need to put down at least 3.5% of the purchase price of the home as a down payment. Now the FHA does allow you to get the down payment as a gift from family members, employers, or charitable organizations. But one way or another, you must put down at least 3.5%.

Technically, the FHA doesn’t require borrowers to have reserves or money in a liquid account to pay their mortgage, but it can count as a compensating factor. For example, if you have a high debt ratio, but you can prove to the lender that you have 6 months of reserves (money put aside to pay the mortgage), you may be able to get approved with the higher debt ratio.

While the FHA doesn’t have income limits in order to qualify for the FHA loan, they do have other requirements in regards to your income. You must prove that you are an all-around good borrower. Lenders don’t want borrowers that are risky and could possibly default on their loan. Even though the FHA guarantees the loan and will pay the lender back if you default, it’s still a hassle and a possible loss for the lender.

The more positive factors you can provide a lender when you apply for an FHA loan, the better your chances are of getting approved.

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