How to Apply for an FHA Loan

Lenders will typically ask for the following to verify employee income:

• Recent pay stub showing year-to-date income
• Last two years of W-2 forms
• The lender may have your employer complete a Verification of Employment (VOE)

Direct verification of employment is not required if you meet the following three conditions:

• Your current employer confirms a two-year employment history, or your pay stubs reflect your hire date.
• Only your base pay is used to qualify you for the loan, excluding overtime or bonus pay.
• You sign and submit two forms for the previous two tax years: IRS 4506 and IRS 8821.

Your lender will contact your employer a second time to ensure you are still employed after signing your mortgage documents.

If you derive income from bonuses or commissions, you’ll need a two-year history of receiving that income for the lender to count it on your application. The lender will determine an average of overtime or bonus income over this period to come up with an amount that contributes to your qualifying income. The lender will verify with your employer that overtime and bonus income will continue.

You need two years of part-time or seasonal income for lenders to count it when you apply for an FHA home loan. The lender will verify with your employer that the work will continue.

Income earned from commissions will be considered if you receive 25% or more of your annual income from commissions. The lender will average your commission income over the previous two years. If you have commission income for more than one year but less than two, the lender may contact your employer to assess if your commission income is likely to continue.

You’ll need to submit your most recent pay stubs showing commission income, and you’ll need two years of tax returns.

If you work for a branch of the U.S. military currently, submit pay stubs showing your base pay. If all or a portion of your pay is tax-exempt, submit documents that validate your tax-exempt status.

If you receive additional benefits, provide documentation to show earnings for housing and clothing allowances, flight or hazard pay, rations, proficiency pay or Veterans Administration (VA) benefits. Submit a letter from an authorized military official verifying that benefits are ongoing for at least three years.

Proof of steady income for the self-employed can be more complicated, but you can still qualify if you provide the right documentation. Be prepared: Your loan officer will be much more thorough in examining your documentation.

The FHA does not require professionally prepared business reports. However, having a pro look at your income and profit and loss (P/L) statement is money well spent. If you use a certified public accountant (CPA), the CPA can strengthen your application by providing a letter stating he has first-hand knowledge that you have worked for two years in the same or a similar enterprise.

Make sure you address any outstanding credit issues, disputes with vendors or tax problems before submitting an FHA loan application. The bottom line for the self-employed: Make your paperwork rock-solid. As a small-business person or independent contractor, you will need to show not only that you have had steady employment but also that you have sufficient net income after expenses. Documentation if you are self-employed includes:

• Business income statements for the previous two years.
• Profit and loss statements for the past two years.
• IRS Form 1040, including Schedule C (business income and loss) and, if they apply, Schedules B (interest and dividend income), D (capital gain and loss), E (rents, royalties, partnerships) and F (farm income and loss).
• If you are incorporated, submit IRS Form 1120.
• If you use a CPA, ask for a verification of employment letter stating that the CPA has first-hand knowledge that you’ve worked for two years in the same or a similar enterprise.

If alimony or child support are part of your regular income, your lender will want to be sure the income's source is consistent, will continue for at least the first three years of the mortgage and is verifiable. You will need to submit documentation stating one party is legally obligated to pay the other party, such as a divorce decree, formal separation agreement or court order.

Specific policies vary from lender to lender, and there may be additional requirements. So it’s best to contact your lender to learn its rules before applying and submitting your alimony and child support documents.

The lender will average your interest income over the previous two years and assess the potential of your assets to continue to retain value and produce interest income. The lender can include interest income from investments if you supply your most recent statements from your bank or asset manager showing interest payments. You might also need signed tax returns from the previous two years or a tax transcript directly from the IRS.

The lender can include income from rents on property you own if you can show that the income is stable. Expect to provide current leases if you don’t have tax returns showing rental income. You may supply bank statements and canceled checks. If you have been claiming rental income on your taxes, submit IRS Form 1040, Schedule E. Roommate income does not qualify unless the boarder is related to you by blood or marriage.

If a federal, state or municipal entity subsidizes your mortgage through direct payments or tax rebates, submit documentation from the appropriate agency showing earnings from a mortgage subsidy or tax rebate payments.

The lender can add these payments to your gross income to figure qualifying income or subtract the amounts from the mortgage payment to assess your qualifying ratios.

The lender will consider retirement income as a contribution to your qualifying income only if the income is expected to continue for more than three years after the date of the mortgage application.

The lender can include retirement income, like a 401(k), using your federal tax returns. You can prove Social Security income using your federal tax returns or a statement or current award letter from the Social Security Administration.

The lender can include federal benefits income, like Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), if you can show income from your federal tax returns, a budget letter or 1099/1042S benefit statement from the Social Security Administration and recent bank statements showing regular deposits.

FHA loan requirements involve a lower credit score than conventional loans, starting at a minimum of a 500 (FICO) credit score. However, this score does not automatically mean you will get approved, as approval depends on other factors like your down payment.

For instance, if you plan to make a down payment of 3.5%, most lenders will require a credit score of at least 580. If you can provide a 10% down payment, you may get approved with a credit score of just 500.

No. The FHA has no minimum or maximum income limit for borrowers. Anyone can borrow so long as they meet the requirements.

In exchange for more relaxed requirements, the FHA requires borrowers to have private mortgage insurance. However, if you refinance your home with a private lender, you can remove your private mortgage insurance.

How much you can get in FHA loans will depend on your financial circumstances and the loan limits of your area. For instance, even if you live in an area with a high FHA loan limit, your lender may approve you for less.

The FHA limits the maximum amount you can borrow based on your county and the number of units in your home. You can use the HUD’s FHA loan limits tool to find out the limits in your home.

The waiting time for an FHA loan approval is similar to that of a conventional loan and can take anywhere from a month to 45 days.

To get approval for an FHA loan, you must have a maximum debt-to-income (DTI) ratio of 56.9%. If you have a DTI higher than this, you may face rejection.