New FHA Mortgage Guidelines for Employment and Income
Posted by John Scott Smith on Thu, Feb 04, 2010 @ 02:13 PM
Right now, there are a lot of changes taking place in FHA mortgage guidelines. As they raise the bar to try and reduce the number of foreclosures, most of those changes are making it more difficult to qualify. This article provides current guidelines for employment and income so that you can take the steps necessary to make certain that you will qualify when you would like to get an FHA mortgage.
We will be covering credit qualifying guidelines in a separate post.
First of all, for some time employment guidelines have remained constant. You must be employed, and you must have an employment record of at least two years in the same field. School counts. So, if you just graduated from a program which took at least one year, and now you have been working in that field for at least one year, you have two years and your employment qualifies.
Other sources of income, such as social security disability or child support, can also count as income. Social security disability counts as income, provided that it is going to continue to at least three years. The same qualification and time line applies for receiving child support. As long as you will continue to receive any of these for at least three years, they count toward your income in qualifying you to purchase a home.
After income, we need to look at your front end debt to income ratio. Don't worry. This one sounds complicated, but let me explain it easily, and then we'll move on to the slightly more technical terms.
Let's assume that you're looking at a $100,000 house. Your monthly payments on that house to the bank will include the interest on the loan, the principal (which is the amount that you will pay down the loan every month), one month's worth of homeowners insurance, and one month's worth of property taxes.
On this hypothetical $100,000 house, your total payment to the bank will probably be pretty close to $775 dollars. Your front end debt to income ratio will then depend on your gross monthly income. If your gross annual income is $30,000, we divide that by 12 months in a year to get $2,500 per month.
And, now for the math: take the monthly payment on the house of $775 divided by your gross monthly income of $2,500 and we get the number .31, or 31%. Generally for FHA, the maximum front end debt to income ratio on your house payment is 31%, so this example works, perfectly. That also means that in order to qualify for a $200,000 house, your income would have to be right around twice the $30,000 per year in this example, or $60,000 per year.
Finally, there is another type of debt to income ratio called your back end debt to income ratio. This one looks at your house payment PLUS your monthly car payment(s), student loan payments, furniture payments, etc. AND the minimum payments on all of your credit cards, combined. For an FHA mortgage, the maximum back end ratio is 43%.
In practical terms, if we continue on our above example for the borrower who earns $30,000 per year and would like to buy a $100,000 house, that means that they can generally have additional monthly payments for cars, credit cards, etc of up to $300 per month and still qualify for that same house. THIS IS IMPORTANT: if their monthly payments on all of these exceeds $300 per month, then they will have to qualify for a less expensive home.
In our next entry, we will cover FHA credit qualifying guidelines.
Still have questions? Please, post your questions and comments, below, and we'll address them.
Join the conversation. Follow us on Twitter or Facebook to participate and stay informed on the latest developments, news, and policies affecting the FHA and FHA mortgages. Follow the author, John Scott Smith, on Twitter.