Are you in the market for an FHA mortgage? Are you looking to purchase your first home, or maybe looking at refinancing into an FHA mortgage? One question I am asked quite by my clients seeking an FHA
mortgage is ‘What are the income requirements?’.
One thing to always remember about FHA, and other loan programs, is that the insuring entity (in this case HUD) sets the minimum standards. Lenders can impose stricter guidelines.
Income is used to calculate your debt to income ratios. The two debt to income ratios that are calculated are:
- Housing Ratio – which is your gross (before taxes) monthly income compared to the proposed mortgage payment, including property taxes, homeowners insurance, and mortgage insurance.
- Total Debt Ratio – is your gross (before taxes) monthly income compared to all of the debt listed on your credit report plus the proposed mortgage payment, including property taxes, homeowners insurance, and mortgage insurance.
A Housing Ratio exceeding 31% may be acceptable if significant compensating factors are documented. While a Total Debt Ratio exceeding 43% may be acceptable if significant compensating factors are documented. However, an approval through the FHA TOTAL Scorecard (FHA’s version of Automated Underwriting System (AUS)) does not require documented compensating factors, even if ratios exceed the FHA guidelines.
In my experience FHA’s TOTAL Scorecard may approve mortgages up to a Total Debt Ratio of 56.99% (although I would never advise a client to apply for a mortgage with ratios that high unless there were other significant factors that made sense).
Lets look at some of the main sources of income and their documentation requirements for an FHA home loan in Ohio:
Ohio FHA Mortgage General Income Requirements
HUD requires that qualifying income be verified, stable and have a reasonable expectation that it will continue for at least 3 years.
This is determined by reviewing the borrower’s past employment record, qualifications for the position, previous training and education, and the employer’s confirmation of continued employment.
General documentation requirements are:
- Most recent paystub, documenting at least 30 days of year to date income
- Previous 2 years W-2s
- Previous 2 years signed, dated Federal income tax returns including all applicable schedules
Ohio FHA Overtime and Bonus Income Requirements
A full verification of employment (VOE), completed by the employer will be required to document a 2 year history of the overtime and/or bonus income. The lender will then take a 2 year average of the income. The employer, also must state whether the overtime and/or bonus income is likely to continue. If it is not likely to continue, the income can not be used. Also, if either type of income shows a continual decline over the 2 year period, the lender may choose not to use the income.
Ohio FHA Part Time Income Requirements
Documentation that the borrower has worked the part-time job, uninterrupted, for the past 2 years.
Ohio FHA Commission Income Requirements
Commission income must be averaged over the previous 2 years
Commission income showing a decrease from one year to the next requires significant compensating factors. Also, unreimbursed business expenses (Schedule A of Federal Tax Returns) must be subtracted from a borrowers gross income.
Ohio FHA Retirement Income Requirements
Must be verified by the previous 2 years Federal Tax Returns
If any retirement income will cease within the first 3 years of the new FHA mortgage, the income may only be considered a compensating factor.
Ohio FHA Social Security Income Requirements
Must be verificed by the Social Security Administration or from the previous 2 years Federal Tax returns. The lender must obtain the current awards letter.A Mortgage Social Security Income Requirements
If any benefits expire with the first 3 years of the new FHA loan, the income may only be considered a compensating factor.
Ohio FHA Self Employed Income Requirements
A borrower with a 25% of greater ownership interest in a business is considered Self Employed for FHA home loan underwriting purposes. Self Employment income is considered stable if the borrower has been self-employed for 2 or more years, self employment between 1 and 2 years may be considered if the borrower is able to document at least 2 years of previous successful employment in the same line of work or related occupation.
Self Employed borrowers must provide:
- Signed, dated individual tax returns, with all applicable schedules for the most recent 2 years
- For a corporation, “S” corporation, or partnership, signed copies of Federal business income tax returns for the last 2 years, with all applicable schedules
- Year-to-Date profit and loss (P&L) statement and balance sheet, and
- Business credit report for corporations and “S” corporations.
If FHA’s TOTAL Scorecard approves the loan, the borrower is not required to provide business tax returns if ALL of the following conditions are met:
- Individual Federal Tax returns show increasing self-employed income over the past 2 years
- Funds to close are not coming from business accounts, and
- The proposed FHA mortgage is not a cash out refinance.
If FHA’s TOTAL Scorecard approves the loan a business credit report for a corporation or “S” corporation is not required.
These are the general FHA guidelines for income. However, each borrower’s employment and income situation may be unique. Ohio residents that would like to discuss their situation can contact T.C. Strait at 513-777-8383 or complete the Free, No Obligation Rate Quote Request
to be contacted immediately.
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