Articles in Category: Debt Ratios

July 25, 2016

FHA Loan Questions: Credit Scores and Down Payments

We get many questions about FHA loan standards for FICO scores and similar issues. Here’s one of the latest: “I am looking to purchase a mobile home for 25000. I have a 610 credit score and a stable job (been there for 8 years). I want to put down 40% of the loan. Do you think I would have any major issues even with a low credit score?” Questions like these are a good reminded that plenty of misconceptions about the home loan process exist. Unfortunately one of the prevailing misconceptions is that FICO scores are THE determining factor in home loan approval. That is not to dismiss the importance of FICO scores. Lender standards require a borrower to have a minimum FICO score (often between 620 and 640 depending | more...

What happens to my FHA loan in a natural disaster?

July 11, 2016

Home Loan Debt Ratios Explained

By Joe Wallace

Analyzing Your Debt Ratio from FHA.com on Vimeo. When you fill out a home loan application, your lender will need employment and income documentation in order to process your loan. The lender is responsible for verifying that you have employment and that your income is sufficient to justify the loan. Not all income counts as “verifiable” by the lender; FHA loan rules have guidelines that include making sure the income is stable and likely to continue. Your lender may also have standards which must be met where income is concerned. There are many types of income, and not all of it comes from employment. Do you receive government assistance, get payments from a trust fund, are entitled to pay or benefits from a government agency related to disability, child support, | more...

June 29, 2016

FHA Loan Questions: Overtime Pay

By Joe Wallace

We get many questions in our comments section about how FHA loan rules may apply to a specific situation with regard to employment, pay, and verifiable income. Some potential borrowers want to know if having frequent changes of employment will negatively affect an FHA loan application (not necessarily) and others want to know if their new commission income will count towards their “effective income” (it depends on how long the commission income has been earned and whether it’s likely to continue). Still others want to know how the question of overtime pay is handled in the FHA loan rulebook. Recently, one reader asked: “I previously worked in law enforcement (resigned in September of 2015) and I obtained a job in another industry which pays me double my previous salary. I | more...

June 23, 2016

FHA Loan Questions: Self Employment

By Joe Wallace

A reader asks, “I am working on getting an FHA loan and my lender asks that I provide W2s. I am self employed via my own business as well as had a regular job how will this affect my loan being that i have no W2 and that my taxes were done via 1099 and 1040 forms for myself and my business?” In cases like these, the lender will require whatever tax documentation that is available to show proof of income. For self employed borrowers, the lender may also require additional documentation such as profit and loss statements, business plans, and other items that may be required. Lender standards will apply so FHA loan rules and minimums are only part of the equation. FHA loan rules in HUD 4000.1 do | more...

June 7, 2016

FHA Loan Questions: Switching To Commission Income

By Joe Wallace

A reader got in touch with us to ask a question about how the FHA views commission income. This question came in response to an older blog post from 2013, well before the FHA and HUD switched over to the new FHA loan rulebook, HUD 4000.1: “I have currently been employed with the same company and same job title for 7 years, I have the opportunity to switch from an hourly wage to a commission percentage but still keep my same job at the same place.I will make a lot more. How will switching to commission affect my approval for a home mortgage? I plan on buying next year maybe a little sooner.” FHA loan rules for verification of commission income are clear. HUD 4000.1 starts off by defining commissions | more...

May 13, 2016

FHA Loan Questions: Non-Borrowing Spouse Debt

By Joe Wallace

FHA loan rules for calculating a borrower’s debt to income ratio are found in HUD 4000.1. There’s an issue some borrowers face when applying for an FHA mortgage that involves whether or not a non-borrowing spouse’s financial data needs to be included in the debt ratio calculation. This issue affects borrowers in states that have community property laws. Such laws govern how a legally married couple’s debts and other financial affairs are viewed in the context of the legal relationship. The debts and financial obligations incurred by legally married couples in these states are often shared regardless of who actually takes out the loan, applies for the credit card, etc. So in these states, certain extra considerations are required of the lender in the home loan application process. If you | more...

April 29, 2016

FHA Loan Questions: Minimum Income?

By Joe Wallace

Recently we were asked if FHA home loans have either an income limit, or a minimum amount the borrower must earn per month/year in order to qualify. FHA loan rules in HUD 4000.1 do not specify a maximum income. FHA loans are designed for those who want to purchase a home and want an alternative to conventional mortgages. FHA home loans are not created for a specific income bracket. Let’s examine the rules for income in HUD 4000.1: “The Mortgagee must document the Borrowers income and employment history, verify the accuracy of the amounts of income being reported, and determine if the income can be considered as Effective Income…” “…The Mortgagee may only consider income if it is legally derived and, when required, properly reported as income on the Borrowers | more...

When Is An FHA Loan Better Than A Conventional Loan?

April 26, 2016

FHA Loans and Borrower Debt: Recent Credit Applications

By Joe Wallace

When applying for an FHA mortgage, like any home loan, a borrower’s debt-to-income ratio will be an important factor in loan approval. The lender needs to know that the borrower can afford both monthly financial obligations as they exist at application time, and those financial commitments plus the amount of the monthly mortgage payment. For that reason, the lender will examine a borrower’s existing debt and compare it with verifiable income to see what percentage of the applicant’s income is taken up by bill payments each month. But what about a borrower’s potential future debt? Lenders have access to the borrower’s credit reports, and that access is used to see what current FICO scores are plus the applicant’s credit history. One thing that shows up on your credit history? Credit | more...

Can I buy a manufactured home with an FHA loan?

April 21, 2016

FHA Loan Rules and Individual Lender Standards

By Joe Wallace

A recent question in the comments section reminds us of the need to differentiate between lender standards and FHA loan rules. Both will have a say in loan approval, terms and conditions, and more. The reader asks, “I was just in bank office today and yesterday. Yesterday before the lender saw my pay stubs i was pre-qualified for 70,000, now after seeing my work hours plus my W2. I’m now approved for only 30,000. How did that happen? I lost 40,000 just by not having 80 hours a week.” There are several issues at work here. The first is the nature of being pre-qualified for a mortgage loan. When you pre-qualify, your lender is giving you an estimate of what you may be able to borrow based on some initial | more...

April 20, 2016

FHA Loan Income Rules: Disability Benefits As Verifiable Income

By Joe Wallace

FHA loan rules in HUD 4000.1 have requirements the lender must meet for verification of income-a borrower’s income must be considered verifiable in order to be counted in the debt to income ratio. Page 268 of HUD 4000.1 starts off by explaining what the FHA considers disability income: “Disability Benefits refer to benefits received from the Social Security Administration (SSA), Department of Veterans Affairs (VA), or a private disability insurance provider.” The lender is required to gather documentation to prove the borrower is receiving such benefits, the duration of them, and whether or not they are likely to continue to be paid. The continuation of the benefits are an important part of this equation: “The Mortgagee must verify and document the Borrowers receipt of benefits from the SSA, VA, or | more...