How much income do I need to qualify for an FHA loan in Washington State? And how do mortgage lenders verify my income?
These are common questions among home buyers considering the FHA loan program. So we’ve put together a short guide that covers this subject. Here’s what you should know about income requirements for an FHA loan in Washington State.
FHA Income Requirements in Washington State
The Department of Housing and Urban Development (HUD) does not have any specific income requirements for home buyers who use the FHA loan program. But they do have some general guidelines for debt-to-income ratios, and also for income verification. So let’s talk about those.
Borrowers who use an FHA loan to buy a house in Washington should have a manageable level of debt that allows them to repay the mortgage obligation. That’s the basic income requirement for FHA loans, as well as other mortgage programs.
HUD’s term for this is “Total Fixed Payments to Effective Income Ratio.” It’s also referred to as the debt-to-income ratio, or DTI. This is a comparison between (A) the amount of money you earn, and (B) the amount you spend to cover all of your recurring debts including the mortgage payments.
In most cases, lenders will review employment and income for the most recent two years. Verification documents typically include W-2 forms, tax returns, bank statements, and employment letters (when applicable).
Ideally, borrowers seeking an FHA loan in Washington should have a total or “back-end” debt ratio no higher than 43%. In other words, your total housing costs and other monthly debt obligations should use up no more than 43% of your income.
But this is a general guideline for which there are many exceptions. So don’t get too wrapped up in that number. In many cases, mortgage lenders can make exceptions for well-qualified borrowers with DTI ratios as high as 50%, or even more. And that brings us to another commonly used HUD phrase — compensating factors.
Compensating Factors: An Exception to the Rule
In the context of FHA debt and income requirements, a compensating factor is a positive trait that offsets a negative one.
Having a debt ratio above 43% could be considered a negative factor. But it’s not necessarily a deal-breaker when it comes to qualifying for an FHA loan. If a borrower has positive factors that compensate for the higher debt level, the loan could still be approved.
According to HUD guidelines for FHA underwriting, compensating factors include:
- The borrower has substantial cash reserves in the bank, above and beyond the amount needed for down payment and closing costs.
- The new mortgage loan will result in only a minimum increase in the borrower’s total housing payment.
- The borrower will have residual income left over each month, after paying all debt obligations to include the mortgage payment
Borrowers with good credit and one or more of the traits listed above could qualify for an FHA loan, even if their debt-to-income ratio exceeds the 43% standard mentioned earlier.
So there isn’t a specific income requirement or cutoff point for FHA loans in Washington State. Income is just one of many factors lenders review when considering applications. It’s the bigger picture that matters most, and there are exceptions to many of the rules and guidelines issued by HUD — including those that deal with income.