Buying a Home? How Your Income Helps or Hurts Loan Approval

May 22, 2023

Your income matters if you want to buy or build a home with an FHA mortgage. But there are some misconceptions about home loan approval regarding income. Do you know the difference between the facts and the fiction about home loan income requirements?

FHA Home Loans Don't Have a Minimum Income Amount

It’s true. There is no dollar amount you can earn to be instantly approved for an FHA mortgage. Why? Because the amount of your income isn’t the only factor worth paying attention to if you are a lender trying to decide whether to approve a home loan.

Income vs. Debt

If you earn $30,000 a year and have few debts, your borrowing power may be greater (circumstantially) than the applicant who earns $60,000 a year but has so much debt that monthly financial obligations take up half or more of that income.

Different Income Types

Lenders pay attention to how you earn your income. If you have recently changed from being a full-time salaried employee to being an independent contractor, for example, how does the lender know whether the new income is likely to continue and is stable?

The passage of time is one way. Those who have earned that new income for 24 months or more may have little trouble using that as what the FHA calls verifiable income, the type that can be used to qualify you for the FHA mortgage.

But if you earn that new income for less than two years, the lender may be unable to count it in typical cases. The same is true for starting a small business.
 
If you have been running it for two years or more, your chances are greater the lender can use that income to approve your mortgage.

Overall Work History

Sometimes it isn’t the money you make but the history of those earnings. Have you had a significant gap in your employment history? Have you had a major career change that puts you in a different financial position? Your lender may seek clarification on those issues before making a decision.

Basically, you want to come to the FHA loan process with as much stability as you can bring to the negotiation process.

You are not guaranteed a loan rejection if you cannot, but you should be prepared to explain your circumstances to the loan officer where needed, and that may require you to provide documentation such as profit-and-loss statements, tax records for your business where applicable, and other supporting information you can offer to help the lender justify approving your mortgage.

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