FHA Mortgage Guidelines:  For the Professional

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FHA Income Guidelines

HUD does not set a minimum length of time that a Borrower must have held a job position to be eligible for a FHA loan. The Lender is responsible for documenting the Borrower’s employment history for the most recent 2 years. If a portion of this 2-year period includes schooling, this must be documented, and the full job history will be analyzed.

Borrower’s income must be verified as “expected to continue” for at least the first 3 years of the mortgage. This rule applies for all types of income including for: wage income, disability, retirement, social security, self-employment, child support and alimony and self employed income. If it is determined during the processing of the loan that the Borrower’s employment and income status is subject to a negative change, the file may be subject to a counter-offer or a denial.

Overall job history will be analyzed for both career pathing, job changes for advancement and or wage increases and motivation. The Borrower must document the circumstances for the changes if the file is manually underwritten.

Pending Retirement and/or Reduction In Income: 
The effective income to be used to qualify must be the (reduced) retirement (or other type) of benefits that will be taking effect soon.

Overtime and/or Bonus Income: 
Both may be used to qualify. An average of the most recent 2 years (per W-2’s) and current YTD gross income must be averaged. The income amount to be used must be the lesser of current YTD or the 2-year average.

Part Time Income From a 2nd Job:
A 2nd job may be used for income if the Borrower shows a 2-year (or more) history of holding down the extra job. An average over the 2 years plus YTD gross must be used to qualify.

Commission Income: 
This income must be averaged over the most recent 2-year history by analyzing the Borrower’s tax returns. Current pay-stubs must also document the fact that commission is being currently received by the Borrower. In addition, when reviewing the tax returns, any un-reimbursed business expenses must be subtracted from the Borrower’s income before the 2-year average is computed. See further information in
the section regarding self-employed Borrowers.

Notes Receivable: 
A copy of the note must document the amount and length of payment to be received by the Borrower. Borrower must also provide copies of tax returns or cancelled checks to show receipt of such income for at least the most current past 12 months.

Interest & Dividends: 
This income may be used by averaging a 2-year history of income received on the most current tax returns. Any funds for the loan transaction that are derived from the source(s) providing the interest or dividend income must be subtracted before projecting future income from these same sources.

VA or Social Security Income:
The government agency providing the income must provide written verification of the payment. The current amount shown on the award statement may be used, but satisfactory proof of a 3-year continuance must be documented.

Government Assistance Programs:
Income received from welfare, unemployment, workman’s compensation, foster children care, etc. may be used only if the government agency provides satisfactory documentation that the income will continue for at least 3 years. If the income cannot be verified as continuing during the required period, the income may only be considered as a compensating factor for higher ratios than 31/43 standard. NOTE: To use unemployment income, a 2-year average of receipt must be used to qualify. There must be a satisfactory assurance of continuance due to the nature of the job.

Rental Income / Rental Liabilities
If the borrower vacates one principle residence for another principle residence the mortgage payments will be included as a debt unless the LTV on the vacated property is less than 75%.  This is new as of September 2008 according to mortgagee letter 2008-25.  You can download the letter from this link: Mortgagee Letter 2008-25

Rent received for qualifying properties owned by the Borrower may be used subject to proper verification on tax returns and/or leases. For  properties owned by the Borrower, the most recent 2 years tax returns must be obtained and an average of the Schedule E income must be documented. (NOTE: If the most recent tax return shows a greater loss than the 2 year average, the lesser income is to be used.)

Depreciation may be added back into income and the positive income is to be added to Borrower’s wage income, but any negative income is to be treated as a recurring debt.

The 1003 application must list each property owned by Borrower and the tax returns must match the 1003 information. The Lender must verify the total number of properties that are currently owned by the Borrower and verify the total number of FHA mortgages (if any). If six (6) or more units (not properties) are owned by the Borrower in the same general 2 block area, a map disclosing the locations of the properties must be submitted to evidence the compliance with HUD’s limitation of 7 units rule.

Any properties recently sold must be verified as sold by obtaining the HUD-1 closing statement from the Borrower. Properties recently purchased may not show on the tax return and current leases (of 1 year term or more) must be obtained from the Borrower to verify current income being received. The income from the lease must be reduced by a 25% vacancy factor before calculating final income to be used.

Rental income to be used on the purchase of a (new) Multi family (2-4) unit property will be determined by the FHA appraiser who will verify the current market rent applicable to the property. Lender is to use 85% of the appraiser’s rent forecast as the qualifying income. (See other requirements listed in separate section for 3 and 4 unit properties).

Auto Allowance & Expense Account Reimbursement:
Only the amount by which the Borrower’s allowance or reimbursement exceeds the actual expenses may be used as income.

The Borrower must provide the most recent 2 years tax returns and Form 2106 from each year must be analyzed. If the income exceeds the expenses, a 2-year average of this income may be added to Borrower’s wage income to qualify. If a loss occurs, the loss is to be treated as a long-term debt.

If the Borrower reports Mileage income, the standard IRS allowance must be used to qualify. NOTE: The Borrower’s monthly vehicle payment(s) must be treated as a long term debt. The payments may not be offset by the auto allowance or reimbursement.

Trust Income:
Income from Trusts may be used if the guaranteed, constant payment can be documented as continuing for 3 years or more. Documentation requirements include a copy of the Trust Agreement, the trustees’ statement confirming the current status of the account (to confirm amount, frequency of payment distribution and the length the payments will continue). NOTE: Any funds used for the loan transaction must be deducted from the balance of the trust account when calculating continuing income.

Non-Taxable Income:
Certain types of disability or public assistance payments are NOT taxable to the Federal Government. The amount of tax savings attributed to this type of income may be added to the monthly income amount for qualifying purposes. The percentage of income that may be used may not exceed the appropriate tax rate for the same income amount for the individual borrower. This addition of tax savings to income is commonly referred to as “Grossing Up Income.” Currently, the amount of “gross up” allowable by HUD is 25%. The Lender is responsible for justifying the amount of gross up and ensuring the income is truly non-taxable.

Borrowers Employed By A Family Business:
The standard verification via pay-stubs and VOE’s is required. In addition, the business must verify whether or not the Borrower holds any ownership interest in the company. The accountant for the family business may provide a written statement that verifies ownership within the company. At the Underwriter’s discretion, a review of the Borrower’s tax returns and/or the company tax returns may be warranted.

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