FHA Mortgage Income Requirements

FHA calculates monthly debt and income

One of the most important aspects in qualifying for a loan insured by the Federal Housing Administration involves the borower's ability to repay the loan. When a homeowner defaults on an FHA loan, the government agency must refund the lender's losses. FHA manages risk by imposing household income requirements on applicants, ensuring that they earn enough to cover the monthly mortgage payment, which includes principal, interest, property taxes and insurance--or PITI.

Debt-to-Income Ratios

FHA relies on the borrower's debt-to-income ratios to determine his eligibility. Generally, FHA wants the borrower to maintain a total monthly mortgage payment, or PITI, within 31 percent of their gross (pre-tax) monthly income, according to FHA Loan Pros. This debt-to-income is called the front-end ratio. FHA also has a back-end ratio requirement, which compares the borrower's total monthly debts (including mortgage) to the income. The debt considered here includes monthly payments on credit cards, car loans, school loans and family support obligations, to name a few. This debt-to-income may not exceed 43 percent of the borrower's gross monthly income. According to FHA Loan Pros, the ratios can be stretched to 33/45 (front-end/back-end) when purchasing an energy-efficient home.

Allowable Income Sources

FHA only considers income that comes from a verifiable, stable and continuing source, such as an employer. Self-employment income is considered stable and effective if borrowers have had the business for at least two years. HUD refers to this as "effective income." FHA verifies the borrower's and co-borrower's employment over the most recent two years to calculate their household income. For those employed in seasonal positions, as is common in building or agriculture, the FHA can make allowances for this type of income. In most cases, the borrower's effective income is limited to salaries or wages expected over the first three-year period of the mortgage loan. If the borrower plans to retire during this time period, he must provide documentation of his expected retirement benefits, Social Security payments or other payments he expects to receive. Part-time income, which supplements the borrower's full-time employment and is worked less than 40 hours a week, may also be used to qualify. Part-time jobs must be held for the past two years or proved likely to continue by the employer.

Overtime, Bonus and Commissioned Income

Borrowers may use bonus and overtime income to qualify if they have received it for the last two years and the employer can verify that it is likely to continue. The FHA-approved lender calculates the average monthly overtime or bonus earnings for the past two years. Lenders must also consider any decline in these earnings or any large variance in them over the years and document the trend. Commission income is also averaged over two years and the lender must review the borrower's tax returns or tax transcript from the IRS as well as a recent pay stub.

References

• FHA Loan Pros: FHA Mortgage Guidelines--Underwriting Guidelines