Contract Employment FHA Guidelines: What You Need to Know
If you are a contract employee looking to purchase a home, you may be wondering about your options for financing. The Federal Housing Administration (FHA) offers mortgage loans to individuals who may not meet traditional lending criteria, including those with non-traditional employment situations such as contract or freelance work. However, there are specific guidelines that must be met for contract employment FHA loans. In this article, we will cover everything you need to know about these guidelines.
Verification of Employment
One of the main requirements for contract employees seeking an FHA loan is verification of employment. The lender must be able to verify that you have been employed in your current contract position for at least two years. This can be done by providing documentation such as copies of contracts, payment history, and tax returns. The lender may also contact your employer directly to verify your contract status and income.
Stable Income
In addition to verification of employment, FHA lenders also require proof of stable income. This means that your income must be consistent and reliable, even though you are not a traditional W-2 employee. The lender will evaluate your income history, including any fluctuations in income over the past two years. They will also consider any potential for future income stability based on your contract terms.
Debt-to-Income Ratio
Another important consideration for contract employees seeking an FHA loan is the debt-to-income (DTI) ratio. This ratio compares your monthly debt obligations to your monthly income. The FHA typically requires a DTI of no more than 43%, although lenders may have lower requirements. It is important to note that contract employees may not have the same deductions and withholdings as traditional employees, which can impact their DTI ratio.
Reserves
FHA lenders may also require reserves from contract employees seeking a mortgage loan. Reserves are assets that can be used to cover the borrower`s mortgage payments in case of unforeseen financial difficulties. Typically, borrowers are required to have at least two months of reserves on hand, although this can vary based on the lender`s requirements.
Credit Score
Lastly, contract employees seeking an FHA loan must meet credit score requirements. The FHA does not have a minimum credit score requirement, but lenders typically require a score of at least 580. However, if your credit score is below 580, you may still be able to qualify for an FHA loan if you can provide additional documentation of your financial stability.
Conclusion
If you are a contract employee seeking an FHA loan, there are specific guidelines that must be met in order to qualify. These guidelines include verification of employment, proof of stable income, a low DTI ratio, reserves, and a good credit score. By understanding these guidelines and working with a reputable lender, contract employees can achieve their dreams of homeownership.