Are FHA loans available to low-income families in 2014?

Reader question: “My husband and I have been renting for about eight years. We want to buy a house and are considering the FHA loan as our best option. We have two children. Are FHA loans a good match for low-income families in 2014? Or is there a better program out there for people like us? Between my husband and I, we earn just under $60,000 per year. Is that enough income to qualify for an FHA loan, or is it just too low? Many thanks for your help!”

Some families with low income may be able to qualify for an FHA loan in 2014. But this will depend on how low your income is in relation to (A) the mortgage amount you are seeking, and (B) your total monthly recurring debts, including the estimated mortgage payment. This is typically how lenders assess you as a potential borrower. They compare your debt to your income, both with and without the mortgage payments added on.

You’ve said you earn $60,000 per year, between the two of you. This may or may not be considered low income. It depends on the cost of housing where you live, and the size of the FHA loan you will need to finance your purchase. For example, if you could find a suitable home for under $200,000, and you don’t have a lot of other debt to pile on top of that, your combined debt-to-income ratio could be low enough to qualify you for an FHA loan.

Here’s a hypothetical scenario using your gross monthly income:

  • For a loan of $150,000 at current interest rates, monthly payment = $769
  • ¬†Other recurring monthly debts (car payment, credit cards, etc.) = $500
  • Total monthly debt = $1,269
  • Your gross monthly income (60K / 12) = $5,000
  • ¬†Total or “back-end” debt-to-income ratio for mortgage loan = 25%

To get the DTI ratio, I took the hypothetical monthly debt and divided it by your gross or pre-tax monthly income. So it looks like this: (1,269 / 5,000 = 0.25, or 25%). You can plug in your actual numbers for a more accurate DTI ratio.

A total debt-to-income ratio of 25% is actually quite good, as far as qualifying for an FHA loan. It would not raise any red flags. You probably wouldn’t be considered a low-income family in this FHA lending scenario.

Granted, homes may be more expensive in your area. If you live in a small town in a moderately priced area, the above scenario might actually be realistic. If you live in or near, say, San Francisco or New York City, it’s probably not realistic. So you might not even be considered a low-income family for FHA loan purposes. It largely depends on where you live, and average cost of housing in that area.

There’s low income for government programs and benefits, and there’s low income for FHA mortgage qualification purposes. They are two different things.

In 2014, as a result of new lending rules, lenders must determine that you have a reasonable ability to repay your loan obligation. That is their primary concern. They look at a variety of underwriting factors to determine this — not just your income. They will examine your employment situation, your current debt level, assets, and other factors. If you check all of these boxes, you can probably get approved for FHA financing. If they determine you are a low-income borrower, to the point you can cannot afford to take on a loan, you probably won’t get approved.

Talk to a lender and have them run the numbers. You’ll know soon enough. A lender can prequalify you based on a quick review of your finances. It’s better than seeking input from strangers online.

So, can low-income families get an FHA loan in 2014? It depends on how low the income is, in relation to the total monthly debt obligation. Some families can swing it, while others cannot. It’s a case by case thing, not a blanket rule.

Families that are truly low-income typically have trouble qualifying for an FHA loan, or any mortgage for that matter. This was true in the past and will be true in 2014 as well.

According to the Population Reference Bureau (I had never heard of them either), a low-income family is defined as “those earning less than twice the federal poverty line.” For instance, in 2011, the low-income threshold for a family of four with two children was $45,622.

The threshold may have changed since then. I could not find anything for 2014. But with two children and a combined income of $60,000 per year, I don’t think you would be considered a low-income family … for FHA loan purposes, or for any other purpose.