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:
Rent received for 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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