Pushing the envelope: How much income do you need to get an FHA loan?

by Gina Pogol
October 21st, 2010

The demise of stated income loans (and stated assets loans, and stated employment loans, and all the other fog-a-mirror mortgages out there) has focused folks on income again. The more information you read, the more confused you may get about what income is required to get approved for a mortgage.  Mortgage sites and their pre-qualifying calculators toss out a wide range of income needed to buy or refinance your next home. That’s not helpful to you if you want to cut to the chase: what debt-to-income ratio is acceptable to get approved for an FHA mortgage? 28 percent? 38 percent? 48 percent?

Those of you who dislike fuzzy right brain stuff will hate me because I’m here to tell you that there is no right or wrong answer to this. The FHA’s own guidelines don’t put limits on debt-to-income ratios. But they do direct underwriters in analyzing your financial position. Here are a few factors that allow you to stretch and get approved with less income (or cause you to need more).

Shocking stuff

“Payment shock” is the term used to describe a ginormous increase in housing expense, and it is considered bad. You might be little-Miss-Perfect when it comes to paying your one credit card on time. However, if you have lived rent-free with your parents the entire 38 years of your life, underwriters will be concerned about your ability to make a $3,000 a month house payment. Especially if your savings over that 38-year period amount to less than the booze budget for your last Cancun vacation. On the other hand, someone whose proposed house payment eats up 40 percent of her income may have no problem getting approved if she had been paying that much in rent for the last year — especially if she managed to save her down payment at the same time.

Just say no

Conservative use of credit is another way to rack up extra brownie points and get a bigger mortgage. The applicant who keeps a couple of credit cards for convenience and pays them off every month is a lot more attractive than the big shot with an Amex in every color and 100 percent loans on his SeaDoos, ATVs, and boat. Just say no to excess debt, and lenders may just say yes to you.

Kicking assets

Another proof of good money management is a savings program. In fact, applicants with a thin credit history can beef it up if they make regular payments to a savings account. It’s treated just like on-time payments to a creditor! In addition, the more money you have, they better looking you are (what else is new?!). But underwriters have a way of quantifying exactly how attractive you are — it’s called “reserves.”  Take the amount you will have in savings after closing on your home, divide it by your total monthly payment (including taxes and insurance etc.) and that is the number of months of reserves you have. It indicates that if you lose your job you can make your house payment for some time. Underwriters find reserves very sexy.

Finally, you can push the income envelope further if you make a bigger down payment. I won’t use the term “skin in the game” because I am sick to death of that saying…oops.  But it works — I had a borrower with pretty ugly credit, subprime all the way, but she put 20% down and voila! Approval!

Rules were meant to be broken: other compensating factors

Yep, that’s what FHA calls them, compensating factors. And they come in lots of flavors, like these:

* Take a home ownership class

* Buy an energy-efficient home

* Don’t job hop — stability is great

Someone with the right compensating factors can get approved with a debt-to-income ratio of 50 percent, and someone with, um, reverse compensating factors, might only get to have a 34 percent debt-to-income ratio. In the industry, we call it “make sense” underwriting.

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