Using Income from a 2nd Job
Generally speaking, each program wants to make sure that the borrower has a stable and documented history of working two jobs. This is very common for many occupations (health professionals, firefighters, etc), as full time is often less than 40 hours per week. Schooling/Training directly related to the borrower’s current position can often count as work history. This flexibility can help you qualify for borrowers!
•FANNIE Conventional DU: Requires a 24-month uninterrupted history of secondary employment, but an underwriter may accept a shorter history as long as it at least 12 months if there is other positive factors. Found in Ch. B3-3.1-05
•FREDDIE Conventional LP: Requires a 24-month uninterrupted history of secondary employment, but an underwriter may accept a shorter history as long as it at least 12 months AND there are other positive factors and we can support that the income is stable. Guidelines also give specific instructions for teachers who teach summer school – this income would be allowed at the start of the second summer the borrower is teaching. Also, if a borrower had a 40 hr primary job, and was laid off and replaced the income with two part-time 20 hr. jobs in the same field/line of work could be considered as stable after 12+ months. Found in Ch. 5305.2
equires a 24-month uninterrupted history of secondary employment in order to use income to qualify, and there must be a likelihood of continuance. Found in 4000.1 handbook, Part II, Section A, part 4, section c.
•VA: Secondary income is generally not considered stable unless it has a 24-month history and a likelihood of continuation. If the income has been received for at least 12 months, the underwriter may at their discretion, use it to offset debts that have 10-24 months left (car notes, installment loans, etc.) Found in Ch.4, 2-h
•USDA: USDA follows FHA guidelines for secondary income as the USDA guidelines do not specifically address secondary income
Unacceptable Sources of Income
Income derived from any of the following may not be used in calculating qualifying income:
• Projected income
• Draw Income
• Capital withdrawals
• Expense/Auto Reimbursement
• VA Education Benefits
• Income not listed on Tax Returns
• Any income that cannot be documented and verified.
How much house can you qualify for?
Traditionally, mortgage lenders have used something known as the 28/36 rule to determine how much of a mortgage you can qualify for. This refers to two income ratios that provide guidelines for your maximum monthly payment.
Front-end ratio-The “28” is known as the front-end ratio and says that your mortgage payment, including taxes and insurance, shouldn’t exceed 28% of your pre-tax income.
Back-end ratio-The “36” is called the back-end ratio, which means your entire debt load, including your mortgage payment, car payment, credit cards, student loans, and other monthly payments shouldn’t exceed 36% of your pre-tax income.
Some lenders will stretch these limits even further. For example, if your loan is a qualifying mortgage under Fannie Mae’s underwriting standards, and you meet a few other requirements, you can qualify for a debt-to-income ratio of up to 45%. In other words, if your monthly paychecks are $5,000 before taxes, you could qualify for a mortgage as long as it doesn’t cause your monthly debt load to exceed $2,250. No doubt this is on the high end of the spectrum for what you can afford with little cushion for unexpected events.
Credit history – Lenders will generally review your FICO Score to better understand your risk as a borrower and the interest rate offered. Homeowners will need a minimum FICO Score of 580 to qualify for an FHA, low down-payment mortgage. Potential homeowners with larger down payments will need a FICO Score of 620 to 660, depending upon lenders. That’s not to say anyone with a lower score won’t qualify, but there’s no hard-and-fast rule on credit scores and qualifying for a mortgage.
If you’re thinking of buying a home for the first time, or maybe haven’t owned since the real estate collapse starting in 2008, you may be wondering what credit score you need to get a mortgage.
In fact, before the housing market crashed, it was far easier for the average person to get a loan since credit standards were very low (or nonexistent!) and the subprime loan market was nearly unregulated.
However, banks and lenders have tightened up their lending standards since then (which is a good thing), including the credit score you need to qualify for a mortgage.
So let’s look at some data that will help us define what score you need to get a mortgage loan approved:
What credit scores are being turned down for loans?
To help gauge what credit score you realistically need to buy a home (and get a mortgage), we can also check the average credit score for loans that were actually denied.
In fact, the average credit score has dropped to 645 in 2017, a decrease from a declined loan average of 675 in 2016. (The number and percentage of declined loans has also dropped.)
According to FICO, the average score for denied FHA purchase applications was 636.
For VA loans, the average FICO score for denied purchase loan applications is 642.
Crunching the credit score data for closed loans
We can also ascertain some data about not just guidelines, but information from actual closed loans.
Mortgage servicer Ellie Mae is a great source for that information, since about a quarter of all loan applications in the U.S. pass through that agency.
After tracking 3.7 million loan applications, Ellie Mae found that the average FICO score for approved/closed FHA loan applications is 645, down from 689 in 2015.
Approved conventional loans have an average score of 719, down from 731 a year ago and 755 in 2015.
For VA loans, the average approved purchase loan has a 707 FICO now.
Credit score minimums by loan type
The easiest way to figure out what credit score you might need to buy a house is to just open the “rulebook” for different loan types.
FHA loans have a minimum credit score requirement of 500 with a 10% downpayment.
But most FHA loans are approved with a score of 580 and up
VA Loans – 620+ credit score
USDA Loans – 640+ credit score
FHA 203K Loans – 620+ credit score
Conventional Loans – 620+ credit score
But that doesn’t mean you’ll be approved with that credit score!
Don’t get too excited if you have those minimum credit scores, because that doesn’t mean you’ll be automatically approved.
That’s because individual lenders apply what’s called “mortgage overlays” which means they have more stringent credit standards than those programs dictate.
In fact, a recent study by Fannie Mae found that nearly two-thirds of mortgage lenders apply mortgage overlays these days, with 47% of lenders calling for higher credit score overlays.
For instance, FHA – the Federal Housing Administration – may only require a 500 credit score on paper, but the FHA also doesn’t lend any money or issue any loans! Instead, the FHA is a governmental agency that insures loans made by other lenders, and so we see it’s rare and difficult to get an FHA loan approved with a score under 580.
Remember that the lower your credit score, the more you can typically expect to pay for your mortgage interest rate. For instance, with FHA if your score is:
579 and lower score: If you get approved at all, your interest rate will probably be 2% higher than conventional rates.
580-619: Your interest rate will be up to 1% higher than the lowest rates available.
620-679: Your interest rate will only be bumped up slightly – probably by about .5%.
680+: Your rate probably won’t be affected at all, and with a 720 or 740 and up score, the best rates will be available.
What is the average credit score for mortgage holders, and homeowners?
To put it another way, people with mortgages have higher credit scores than the general public, as do homeowners. In fact, the average credit score among non-mortgage holders in the U.S. is 613, compared to 649 for FHA loan holders, and 652 for conventional real estate mortgagees.
So is YOUR credit score good enough to buy a house? Chances are that with our help and a few months, you’ll be in prime position to qualify for a great home loan and get the keys to a new house!