Government-loans help borrowers that would otherwise be unable to get conventional financing purchase a home. Because they are more flexible, they have different guidelines you have to meet including income limitations for some programs.
Luckily, the FHA program doesn’t have any income limitations. There’s no such thing as making too much money for an FHA loan. The more money you make, the lower your debt ratio becomes, which can increase your chances of securing financing, such as an FHA loan.
How to Qualify for an FHA Loan
FHA loans have more flexible guidelines than you’ll find with conventional financing. Fannie Mae and Freddie Mac loans require a 5% down payment, 680 credit score, and 28/36 debt ratio. Those guidelines can be hard to meet for some borrowers.
The FHA program has much more flexible guidelines as follows:
- Minimum 580 credit score – Technically, you can even have a 500 credit score and still qualify, but you’ll need a 10% down payment to make up for the risk
- 31% housing ratio – Your new housing payment, which includes your principal, interest, taxes, and insurance can be as much as 31% of your gross monthly income
- 41% total debt ratio – Your total debts can cost as much as 41% of your gross monthly income
- 5% down payment – Your down payment doesn’t have to come from your funds; you can receive gift funds from family, your employer, or a charitable organization
- Stable income/employment – You must prove that your income and employment are consistent and will continue for the foreseeable future
As you can see, the more income you make, the lower your debt ratio becomes. You won’t get disqualified because you make too much money. The government program that disqualifies borrowers for making too much money is the USDA loan. This program is for low-income families that cannot secure any other type of financing, such as the FHA loan.
Higher Income Can be a Compensating Factor
If you need an FHA loan because one of your qualifying factors isn’t the greatest, you may want what lenders call compensating factors. These factors help make up for the risk you pose. For example, a 3.5% down payment puts the lender at risk. That’s not a lot of your own money invested in the home. If you default, you won’t lose too much of your own money. This could make a lender inflate your interest rate or charge you origination points to make up for the risk.
If you have compensating factors to make up for the risk, though, this may not happen. Higher income can be one of the best compensating factors because it trickles down into your debt ratio. If you need the FHA loan because of your low down payment, but you have a debt ratio that meets the conventional guidelines, FHA lenders will see you as low risk. You have enough income to cover your debts and still have plenty of disposable income left. In this case, higher income can help your case.
Explore Your Options
Make sure you explore all of your available options for your mortgage. Don’t just assume you won’t qualify for a conventional loan – try applying for one. You could even ask your loan officer what they think based on your credit scores, debt ratio, and other qualifying factors. Loan officers usually have a good idea of what programs you’ll be able to get.
When you explore your options, you’ll know which loan suits your needs the most. You can compare interest rates, closing costs, and the loan’s APR to determine which loan is right for you. Keep in mind that if you take the FHA loan that you’ll have to pay upfront mortgage insurance at the closing as well as annual mortgage insurance every month until you pay the loan in full.
If the FHA loan is your only option, it can be a good one because of its flexible guidelines. Maximizing your income before applying for an FHA loan can help lower your risk of default, giving you a better chance at better loan terms on your FHA loan.