Articles in Category: Debt Ratios

February 17, 2017

Gaps In Employment, Reductions of Income: FHA Loan Rules

FHA loan rules in HUD 4000.1 for single family home loans and refinance loans include instructions for the lender on how to verify a borrower’s income and employment. There are several reasons why this verification must be made, but one important one is to insure the income used to qualify for an FHA loan is stable, reliable, and likely to continue. The lender is basically looking for indications that this is so, but how does the loan officer interpret financial setbacks such as gaps in employment or reductions of income? What are the FHA requirements in this area? HUD 4000.1 addresses these issues. For example, when it comes to certain gaps in a borrower’s employment history, the following may apply: “For Borrowers with gaps in employment of six months or | more...

January 12, 2017

FHA Loan Rules For Part-Time Income

By Bruce Reichstein

FHA loan rules require the lender to verify both employment and income. The lender must determine that a borrower’s income is both stable, and likely to continue for the purpose of making the mortgage loan payment. But what kinds of employment can a lender use to qualify the borrower? A reader got in touch with us recently to ask, “What if I have a 20 year old borrower that graduated HS in 2014. She has 2 jobs (receptionist at both). One shes had for 2 years 9 months and only works 15 hours a week and the second shes had for 1 year 4 months and puts in 20 hours a week. Will FHA accept both incomes as qualifying income?” FHA loan rules covering this issue are found in HUD | more...

January 9, 2017

Collection Accounts and FHA Loans

By Joe Wallace

We’ve had some recent questions about home loans and collection accounts lately; in light of those questions it seemed like a good time to review the FHA loan rules on collection accounts as found in HUD 4000.1. The FHA loan rule book has instructions for the lender on what to do when reviewing such credit report data and it never hurts to know what your loan officer’s marching orders are in this area-at least where FHA minimum standards are concerned. The information below may be supplemented or affected by lender standards, so know that you’ll need to see what’s possible with a specific lender if any of the rules quoted here apply to your circumstances. Lender standards will definitely apply in addition to what’s found in HUD 4000.1. Let’s begin | more...

November 28, 2016

The Debt To Income Ratio: FHA Rules In 2017

By Joe Wallace

If you are thinking about your FHA loan options in 2017, one area to pay special attention to (especially over the holidays) is your debt to income ratio (DTI). This ratio is one of the most important factors in the lender’s decision to approve or deny a home loan-it can be just as crucial as your FICO scores. The debt to income ratio is a calculation your lender will make by taking the amount of verifiable income you have and comparing it with the amount of your monthly financial obligations. This ratio is calculated with and without your proposed mortgage payment in order to determine if you can afford the loan payments every month. How does the lender make these calculations? According to HUD 4000.1, pages 177 and 178: “The | more...

FHA Loans And Natural Disasters: What You Should Know

November 15, 2016

FHA Loans And Debt: A Student Loan Question

By Joe Wallace

A reader asks, “I am a mother who is on a fixed income of $1600.00 a month in ft laud. my son is going to be the co borrower who lives and works in LA. Makes a good salary. We already got pre-qualified up to 300k, our credit score is above 680…question is my son has student loan of 33k and is in forbearance until next year. Will this be a problem with (an) FHA loan?” FHA loan rules in HUD 4000.1 instruct the lender on how to view debt, debt ratios, and the kinds of debt known as “deferred obligations” which may not affect the borrower’s debt to income ratio in the short term, but can do so after a home loan has closed. Sometimes, FHA loan approval may | more...

How much can I borrow with an FHA refinance loan?

November 9, 2016

General Income Requirements For FHA Loans

By Joe Wallace

FHA loan rules include specific income requirements for all applicants. That can be an easy statement to misunderstand; FHA loans have no minimum or maximum income limits. Instead, the FHA loan rules state that a borrower’s debt-to-income ratio must be examined (both with and without the monthly mortgage payment factored into the equation) to see whether the borrower can realistically afford the home loan. HUD 4000.1 has the rules for income for “forward mortgages” or new home purchases, and those rules are found on page 186. It begins by defining what the FHA describes as “effective income”: “Effective Income refers to income that may be used to qualify a Borrower for a Mortgage. Effective Income must be reasonably likely to continue through at least the first three years of the | more...

November 1, 2016

Employment: FHA Loan Rules

By Joe Wallace

A reader asks, “I am planning to apply for a home loan, in the next couple months. I am a recent college graduate that has been employed at my current job since May 2016 (just about 6 months). I am planning to buy a house for no more than $110,000, with a $8000 down payment. Will my lack of experience stop me from getting a home loan?” It’s true that in addition to FICO scores and credit history, there are also FHA guidelines for employment and income. In general, FHA loan rules require the lender to either verify two years of employment history or provide alternate documentation of either school enrollment or military service. According to HUD 4000.1, “The Mortgagee must obtain the most recent pay stub and one of | more...

October 19, 2016

Mortgage Payments On FHA Loans: How Much?

By Joe Wallace

One of the most common questions about FHA mortgage payments is naturally, “How much will I have to pay?” And the answer is not as easy as you might think since there are a variety of factors that go into calculating the monthly mortgage payment. FHA loan limits, the amount of the loan the FHA will insure, don’t include the Up Front Mortgage Insurance Premium (UFMIP), for example. So you can’t simply divide the amount of your loan limit and divide by the number of mortgage payments you plan to make. In addition to UFMIP, there are other things to consider. For example, is the borrower planning on an FHA Energy Efficient Mortgage (EEM)? This option allows the addition of extra funds for approved upgrades or improvements to the home, | more...

October 18, 2016

Employment and Income Requirements For FHA Mortgages

By Joe Wallace

A reader asks, “I am a working part time. My annual income is 14,400. I work only 8 hrs a week. I have a savings of $30000. Will I be eligible to get a house loan of $76000? I have a very good credit score. I am working in the current place for past 8 months. I had a full time job before.” FHA loan rules do not specify a minimum or maximum income that makes a borrower eligible for an FHA mortgage loan. What the loan rules DO require is that the income a borrower has be verifiable, reliable, and likely to continue. The lender will have to make a judgment call on whether the borrower’s income meets this criteria. Another important factor in FHA loan approval is the | more...

October 6, 2016

Self-Employed Borrowers: FHA Loan Rules

By Joe Wallace

A growing number of Americans are either self-employed, contract workers, freelance, or otherwise employed in ways that don’t involve being on a company payroll and receiving traditional benefits, and health insurance. FHA home loans are definitely possible for those who are freelance, self-employed, etc. but it’s important to know what the FHA requires on a basic level for applicants who work in this way. HUD 4000.1 has some instructions to the lender for verifying self-employment income, for example, and these instructions may involve more paperwork than for other types of borrowers. To start, HUD 4000.1 spells out its definition of self-employment income: “Self-Employment Income refers to income generated by a business in which the Borrower has a 25 percent or greater ownership interest.” That may seem different than freelance income | more...