Wondering if you can get an FHA loan while unemployed?
You aren’t the first, and the good news is that it’s possible, but there are some crucial things to keep in mind.
In this article, we’ll explore the ins and outs of obtaining an FHA loan while unemployed, so you can make an informed decision and take the first step toward homeownership.
Ready? Let’s go.
FHA Loan Eligibility Requirements
The FHA loan is a government-backed mortgage program for low-income earners. It comes with lenient credit and down payment requirements.
Here are the FHA loan eligibility criteria:
- Credit rating: To qualify for an FHA loan, you must have a credit rating of at least 500. But, if you want to take advantage of the lower down payment option, which is just 3.5%, you’ll need a credit rating of at least 580.
- DTI ratio: Your debt-to-income ratio is the debt you have compared to your income. Your DTI should be at most 43% to qualify for an FHA loan. But, some lenders may be more flexible with this requirement and allow a higher DTI ratio.
- Employment history: You must have a steady employment history to qualify for an FHA loan. Ideally, you should have been employed with the same employer for at least two years or have an account of consistent employment with no gaps.
What Are the Income Requirements for an FHA Loan?
For income, the FHA has variations of requirements that determine your eligibility for the loan program; whether it’s for refinancing, renovation, or the FHA 203k loan.
Here is what to know:
- Employment history: Most lenders prefer to see at least two years of consistent employment with the same employer or within the same field. If there are gaps in your employment history, you may need to provide additional documentation to show that you have maintained a consistent income.
- Self-employment income: If you are self-employed, you can still qualify for an FHA loan, but you must provide additional documentation to prove your income. This may include your tax returns for the past two years, a current profit and loss statement, and bank statements showing your business income.
- Other types of income: In addition to employment income, other sources of income you can use to qualify for an FHA loan include account distributions, investment income, pension income, and retirement account distributions.
Unemployment and FHA Loan Eligibility
If you’re currently unemployed and considering applying for an FHA loan, you may wonder if you’re eligible. The good news is that unemployment doesn’t automatically bar you from getting an FHA loan.
But you need to meet some requirements, including:
- Employment history: If you’ve been unemployed for an extended period, lenders may hesitate to approve your application. However, if you have a strong work history and can show that you’re actively seeking employment, you may still be able to qualify.
- Get a co-signer: A co-signer is a person who agrees to take on responsibility for the loan if you’re unable to make payments. This can be a family member or friend with a stable income and good credit history.
- Income: To qualify for an FHA loan, you must have a steady income. If you’re unemployed, you’ll need to show that you have a source of income that will allow you to make your monthly mortgage payments. This could include unemployment benefits, disability payments, child support, or other forms of regular income.
Other Income Sources for FHA Loan Eligibility
There are many other sources of income besides being employed that can help you secure an FHA loan.
These include:
- Disability income: If you receive disability income, it can be used to qualify you for an FHA loan. But, you must provide documentation from the source of the disability income, such as the Social Security Administration or your employer.
- Rental income: If you own rental property, you can use the income you receive from it to qualify for an FHA loan. Lenders typically require that you provide a current lease agreement and two years of tax returns to verify rental income.
- Social Security income: If you get Social Security income, it can be used to qualify you for an FHA loan. But, you must provide SSA (Social Security Administration) documentation showing your benefits.
Alternative Financing Options for Homebuyers On Unemployment
If any of the above doesn’t help you secure an FHA loan mortgage, here are some alternative financing options for home purchases:
- Lease purchase agreement: A lease-purchase agreement is similar to a rent-to-own program, but the home’s buying price is usually agreed upon at the beginning of the lease term. You will make monthly lease payments, and a portion of these payments will go toward the home’s purchase price.
- Private mortgage: Private mortgages are loans funded by individuals or private companies. These loans often have more flexible eligibility requirements and can be a good option if you have a poor credit rating or low income.
- RTO (rent-to-own) programs: RTO programs allow you to rent a house with the option to buy it at the end of its lease term. A part of your monthly rent payments will go towards building up a down payment for the home.
Are you unemployed and looking to finance the purchase of your first home with an FHA loan in any of these locations? Give us a call and we’ll detail a foolproof plan together with you to bring your dream to reality.
What Are the Pros and Cons of Getting an FHA Loan While Unemployed?
There are downsides and upsides to getting an FHA loan while unemployed. We’ll explore them below to help you decide which works for you.
Pros
- Lenient DTI ratio requirements: With an FHA loan, you can qualify with a higher DTI ratio than you would with a conventional loan. This means that even if you have debt and are currently unemployed, you may still be able to qualify for an FHA loan.
- Lower credit requirements: Even if you are unemployed and your credit rating is not ideal, you may still qualify for an FHA loan.
- Lower down payment: FHA loans have down payment requirements that are typically lower than conventional loans. This can be beneficial if you’re unemployed.
Cons
- Additional insurance costs: FHA loans require mortgage insurance to be paid throughout the life of the loan. This can make your monthly payments more expensive and add up to a significant amount over time.
- Income requirements: Although FHA loans have more lenient credit requirements, they still have income requirements. If you are unemployed, it may be difficult to prove that you have a stable income to meet these requirements.
- Risk of default: If you are currently unemployed, there may be a higher risk of defaulting on your loan, which can have significant financial consequences.
Frequently Asked Questions
Can a co-borrower’s income be used to qualify for an FHA loan while unemployed?
Yes, using a co-borrower’s income to qualify for an FHA loan while unemployed is possible. This can be a practical option for individuals who are temporarily out of work but have a co-borrower who is employed and has a steady income. Your combined income will also determine how much you qualify for.
Can unemployment affect FHA loan eligibility?
Yes, unemployment can affect your eligibility for an FHA loan. When you apply for an FHA loan, lenders look at your income to ensure you can afford the mortgage payments. If you’re unemployed, it may be difficult to meet the income requirements for the loan. Additionally, lenders may consider the consistency of your income when evaluating your application.
How long must you be employed before applying for an FHA loan?
No specific employment length is required, but you must demonstrate a consistent employment history. Typically, lenders like to see at least two years of steady employment, although there may be some flexibility in certain circumstances. You can still qualify for an FHA loan if you have recently changed jobs or have gaps in your employment history.
Still, you must provide additional documentation and explanations to the lender. Ultimately, the lender will review your overall financial situation, including your income, employment history, credit score, and other factors, to determine your eligibility for an FHA loan.
So, What Now?
Getting an FHA loan while unemployed is possible but can be challenging.
You need to meet the minimum income requirements or have other sources of income, such as self-employed income, to qualify for the loan.
What’s important is evaluating your current financial situation to be sure the loan won’t bring too much strain on your current or future finances.
So, if you’re unemployed and struggling to work out if you can get an FHA loan, give us a call, And we’d get you right back on track.
