Income requirements seem to have tightened up since the mortgage crisis is 2007 – 2008. Lenders are less willing to take chances because they do not want to be stuck with the loan or have your loan result in foreclosure. This is not entirely the lender’s fault either – the new guidelines require lenders to do their due diligence in evaluating a borrower’s income, ensuring that they can afford the loan now and well into the foreseeable future. Does this mean that the income requirements for the streamline 203K loan are strict – typically no.
FHA is Lenient
The FHA is known for their leniency on their loan programs. They are the least stringent when it comes to debt ratios, income mishaps, and even calculating income. What used to be known as a first-time homebuyers program has quickly turned into the “go-to” program for most borrowers, especially those that are restarting in life due to a job loss during the mortgage crisis. While the FHA would like 2 years of stable income, they do except Letters of Explanation for dire circumstances as long as you have proof that you have fixed the problem and have made positive changes moving forward.
What the FHA Requires
The requirements for the Streamline 203K loan are just like any other FHA loan. Lenders will ask you for your two most recent paystubs that cover one month of income and your last two years’ worth of W-2s. If you are not a salaried employee, meaning you work on commission or bonus or you are self-employed, you will be required to provide your last two years’ of tax returns. This includes all schedules of the tax return, not just the first two pages, so that the lender can see what expenses you write off as they play a role in the amount of qualifying income you are allowed to use for the loan.
The Role of the Debt Ratio
Your debt to income ratio plays a role in your ability to be approved for the streamline 203K loan. Just as is the case with standard FHA loans, the lender usually likes to see debt ratios no higher than 43 percent on the back-end. This means your mortgage payment (principal, interest, taxes, and insurance) along with any other monthly debts that report on your credit report cannot be more than 43 percent of the qualifying income per month. There are exceptions to the rule with the debt ratio as well, though. If you have compensating factors that can make up for your risky debt ratio, some lenders will grant an exception. This means things like:
- High credit score (over 700)
- Job stability – holding the same job for many years
- Increasing income throughout the years
What the lender is looking for is a stable overall picture. They do not pick apart each qualifying factor for the loan and automatically deny you for it. This is great news for those that wish to fix up their current home or purchase a home that needs a little TLC. The streamline 203K loan enables you to make up to $35,000 in changes to the home as long as they’re not structural. This could mean a large number of changes, making the home exactly how you wish it to look.
In general, you should not give up on your chance at having the streamline 203K loan. If your income is unsteady, it might be best to wait until you have 2 solid years of stable income, but other than that factor, there are many lenders out there that offer this program. Each lender operates differently, as long as they meet the minimum requirements put forth by the FHA. Shop around to find the lender that will accept your income and give you the loan that will help you fix your home up just the way you want it.