Are you planning to use an FHA loan to buy a house in California? Do you have questions about income requirements for borrowers? You’ve come to the right place. We created this guide to clear up some myths and misconceptions regarding California FHA income limits. If your question is not answered below, feel free to contact us.
California FHA Income Limits in 2017
There is no specific income requirement for FHA loans in California. That is, the FHA does not require you to have a certain income level in order to apply for the program, or to be approved for a loan.
But there are some general guidelines for “qualifying ratios,” and these guidelines do take your income into account. So they’re worth knowing about.
Let’s start with some terminology:
The Department of Housing and Urban Development (HUD) uses the term Total Fixed Payments to Effective Income Ratio when explaining these requirements. Yes, it’s a mouthful. This term is also referred to as the debt-to-income (DTI) ratio.
Essentially, it’s a comparison between the amount of money you earn, and the amount you would be spending to cover all of your recurring debts after taking on the mortgage loan.
According to the HUD handbook, the borrower’s “total fixed payment” includes the monthly mortgage payment (with property taxes and home insurance), along with the monthly obligations on all other debts and liabilities. So the total fixed payment is basically your housing costs combined with your other monthly debts, like credit cards and auto loans.
Compare this fixed payment to your monthly income, and you have your overall debt-to-income ratio. This is the first step in determining the FHA income limit for California home buyers.
HUD guidelines state that borrowers seeking an FHA loan should have a debt-to-income ratio no higher than 43%. That means your total housing costs and other monthly debt obligations should use up no more than 43% of your income.
But there are exceptions to this general rule, so don’t get too hung up on that specific number. In fact, HUD gives mortgage lenders quite a bit of leeway when qualifying borrowers for FHA loans — specifically when it comes to their income. And that brings us to another important term: “compensating factors.”
‘Compensating Factors’ Bring Flexibility
So there’s a general guideline for California FHA income limits, and it involves the 43% debt-to-income ratio mentioned above. There are also exceptions to this standard, and they are known as compensating factors.
In many cases, mortgage lenders are able to approve FHA borrowers with debt ratios above 43%, if they can document factors that compensate for the higher debt level.
Compensating factors include, but are not limited to, the following:
- The borrower has significant cash reserves in the bank, beyond what is needed for the down payment and closing costs.
- The new loan will result in only a minimum increase in the borrower’s housing payment.
- The borrower will have sufficient residual income left over each month, after meeting all debt obligations (including the mortgage payment).
Borrowers with good credit and one or more of these compensating factors could be approved even with a debt-to-income ratio of 50%, and sometimes higher. This kind of review is handled on a case-by-case basis, with an emphasis on the borrower’s overall qualifications.
So there isn’t really a specific income limit for FHA loans in California. The debt-to-income guidelines mentioned above are used to ensure that the borrower can afford to repay the loan. But there are exceptions to these criteria.
Bottom line: Borrowers shouldn’t assume they lack the income needed for an FHA loan, or any kind of mortgage program for that matter. The lending industry has become more flexible in recent years, with regard to income and other criteria. The only way to find out for sure if you qualify for an FHA loan is to speak to a lender.