February 5, 2014
A reader asks, “My credit score is 720 and is my first time to buy home , what is the minimum income to qualify to FHA or another Government loan?”
There is no minimum income requirement for FHA home loans. Instead, the borrower’s income is analyzed and compared with the amount of the applicant’s monthly financial obligations. A calculation known as the debt-to-income ratio is used to qualify the borrower.
According to the FHA loan rules found in HUD 4155.1, “When computing the debt-to-income (DTI) ratio, the lender must include the following recurring obligations:
• monthly housing expense, and
• additional recurring charges extending ten months or more, such as
− payments on installment accounts
− child support or separate maintenance payments − revolving accounts, and
− alimony.”
The rulebook adds that any debts lasting “less than ten months must be included if the amount of the debt will affect the borrower’s ability to pay the mortgage during the months immediately after loan closing, especially if the borrower will have limited or no cash assets after loan closing.”
Additionally, “Monthly payments on revolving or open-ended accounts, regardless of their balances, are counted as liabilities for qualifying purposes even if the accounts appear likely to be paid off within ten months or less.”
Some financial obligations are not counted as debts. HUD 4155.1 says these may include:
- Federal, state, and local taxes
- Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds)
- commuting costs
- union dues
- open accounts with zero balances
- automatic deductions to savings accounts
- child care
- voluntary deductions
Borrowers should know that the debt to income ratio is only part of the qualifying information the lender needs. The lender will also use FICO scores, loan repayment history, employment history and additional factors to determine whether the borrower is creditworthy.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: