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FHA Effective Income used for Qualifying

FHA EFFECTIVE INCOME

 FHA home loans are the easiest home loans to qualify for below we will explain how to FHA calculates income for FHA Mortgage applicants. You will also find procedures for calculating effective income, and requirements for establishing income stability.

 But first here is a brief description of FHA home loan advantages

Minimal Down Payment and Closing Costs.

• Down payment less than 3.5% of Sales Price
• Gift for down payment and closing costs allowed.
• No reserves or required.
• FHA regulated closing costs.
• Seller can credit up to 6% of sales price towards buyers costs.

Easier Credit Qualifying Guidelines such as:

• Minimum FICO credit score of 540.
• FHA will allow a home purchase 2 years after a Bankruptcy.
• FHA will allow a home purchase  3 years after a Foreclosure. 

Easier Debt Ratio & Job Requirement Guidelines such as:

• Higher Debt Ratio's than other home loan programs.
• Less than two years on the job is allowed.
• Self-Employed individuals o.k.

www.FHAmortgageFHALoan.com

Calculating Income for an FHA Mortgage loan

FHA looks  at the anticipated amount of income, and the likelihood of its continuance, must be established to determine an FHA mortgage applicants capacity to repay mortgage debt.  The FHA mortgage applicants Income may not be used in calculating the FHA mortgage applicants income ratios if it comes from any source that cannot be verified, is not stable, or will not continue.  This section describes acceptable types of income, procedures for calculating effective income, and requirements for establishing income stability.

 STABILITY OF INCOME.  FHA does not impose a minimum length of time a FHA mortgage applicants must have held a position of employment to be eligible.  However, the FHA mortgage applicant must verify the FHA mortgage applicants employment for the most recent (2) two full years.  If a FHA mortgage applicant indicates he or she was in school or in the military during any of this time, the FHA mortgage applicant must provide evidence supporting this claim, such as college transcripts or discharge papers.  The FHA mortgage applicant also must explain any gaps in employment spanning one month or more.  Allowances for seasonal employment, such as is typical in the building trades, etc., may be made if documented by the FHA mortgage lender.

 To analyze and document the probability of continued employment, FHA mortgage lenders must examine the FHA mortgage applicants past employment record, qualifications for the position, previous training and education, and the employer's confirmation of continued employment.  An FHA mortgage applicant who changes jobs frequently within the same line of work, but continues to advance in income or benefits, should be considered favorably.  In this analysis, income stability takes precedence over job stability.

 In some cases, an FHA mortgage applicant may have recently returned to the work force after an extended absence.  In these circumstances, the borrower's income may be considered effective and stable provided the following conditions apply:

 The FHA mortgage applicant has been employed in the current job for six months or more, and

1. Acceptable documentation includes traditional employment verifications, copies of W-2's or paystubs.

 An example of an acceptable employment situation includes a person that took several years off of work to raise children and then returned to the workforce.  Situations not meeting the criteria listed above may be considered as compensating factors only.

 SALARIES, WAGES, AND OTHER FORMS OF EFFECTIVE INCOME The income of each FHA mortgage applicant r to be obligated for the mortgage debt must be analyzed to determine whether it can reasonably be expected to continue through at least the first three years of the mortgage loan.  If the borrower intends to retire during this period, the effective income must be the amount of documented retirement benefits, social security payments, or other payments expected to be received in retirement.  No inquiry may be made regarding possible future maternity leave.

 In most cases, the FHA mortgage applicant income will be limited to salaries or wages.  Income from other sources can be included as effective income with proper verification by the FHA mortgage lender.  Procedures for analyzing other acceptable income sources besides salaries and wages are described below:

 Overtime and Bonus Income.  Both overtime and bonus income may be used to qualify if the FHA mortgage applicant has received such income for the past two years and it is likely to continue.  The FHA mortgage lender must develop an average of bonus or overtime income for the past two years, and the employment verification must not state that such income is unlikely to continue.  Periods of less than two years may be acceptable provided the FHA Mortgage  lender justifies and documents in writing the reason for using the income for qualifying purposes.

 An earnings trend also must be established and documented for overtime and bonus income.  If either type shows a continual decline, the FHA mortgage  lender must provide a sound rationalization in writing for including the income for FHA mortgage applicants qualifying.  If bonus income varies significantly from year to year, a period of more than two years must be used in calculating the average income.

 Part-Time Income.  Part-time/second job income, including employment in seasonal work, may be used in qualifying if the FHA mortgage lender documents that the FHA mortgage applicant has worked the part-time job uninterrupted for the past two years and will continue to do so in the future.  Seasonal employment (e.g., umpiring baseball games in summer, working at a department store during the holiday shopping season) is considered uninterrupted and may be used in qualifying if the FHA mortgage lender documents that the FHA Mortgage applicant has worked the same type of job for the past two years and expects to be rehired during the next season.  Income from a part-time position that has been received for less than two years may be included as effective income, provided the FHA mortgage lender justifies and documents that the income's continuance is likely.  Income from part-time positions not meeting these requirements may be considered as a compensating factor only.

 For qualification purposes, part-time income refers to jobs taken to supplement the FHA Mortgage applicant  income from regular employment (i.e., a second job – not meaning primary jobs of less than 40 hours per week.)  If a FHA mortgage applicants  regular employment involves less than a typical 40-hour workweek, the stability of that income should be evaluated as any other regular, on-going primary employment.  For example, a registered nurse may have worked 24 hours per week for the last year.  Although this job requires less than 40 hours of work per week, it is the FHA mortgage applicant  primary employment and is to be considered effective income.

 We recognize that many low- and moderate-income families rely on part-time and seasonal income for day-to-day needs.  Lenders must not restrict the consideration of such income sources in qualifying these borrowers.

 Military Income.  FHA mortgage applicants may use military income: In addition to base pay, military personnel may be entitled to additional forms of pay.  Income from variable housing allowances, clothing allowances, flight or hazard pay, rations, and proficiency pay is acceptable, provided its probability of continuance is verified in writing.  An additional consideration may be the tax-exempt nature of some of these payments (see paragraph Q for additional information.)

 Commission Income.  FHA mortgage applicants may us commission income but it must be averaged over the previous (2) two years.  The FHA mortgage applicant must provide copies of signed tax returns for the last (2) two years, along with the most recent pay stub.  (Unreimbursed business expenses must be subtracted from gross income.) FHA mortgage applicants whose commission income shows a decrease from one year to the next require significant compensating factors to allow for loan approval.  FHA mortgage applicants with commission income received for more than (1) one but less than (2)two years may be considered favorably provided the underwriter is able to make a sound rationalization for acceptance and can document the likelihood of continuance.

 FHA mortgage applicants who have commission income earned for less than (1)one year are not considered effective income.  Exceptions may be made for situations in which the FHA mortgage applicants  compensation was changed from a salary to commission within a similar position with the same employer.  A FHA mortgage applicant also may qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the FHA mortgage.

 Retirement and Social Security Income.  Retirement and social security income require verification from the source (former employer, Social Security Administration) or federal tax returns.  If any benefits expire within the first full three years, the income source may be considered only as a compensating factor.

 Child Support, Alimony, or Maintenance Income.  Income in this category may be considered as effective if such payments are likely to be consistently received for the first three years of the FHA mortgage.  The FHA mortgage applicant must provide a copy of the final divorce decree, legal separation agreement, or voluntary payment agreement, as well as evidence that payments have been received during the last twelve months.  Acceptable evidence of payment regularity includes cancelled checks, deposit slips, tax returns, and court records.  Periods less than twelve months may be acceptable, provided the payer’s ability and willingness to make timely FHA mortgage payments is adequately documented by the FHA mortgage  lender.

 Notes Receivable.  A copy of the note must be presented to establish the amount and length of payment.  The FHA Mortgage applicant also must provide evidence that these payments have been received consistently for the last twelve months, which may include deposit slips, cancelled checks, or tax returns.  If the borrower is not the original payee on the note, the FHA mortgage  lender must also establish that the FHA Mortgage applicant is now a holder in due course and able to enforce the note.

 Employer Differential Payments.  If the employer subsidizes the FHA mortgage payments through direct payments, the amount of the payments is considered gross income; it may not be used to offset the FHA mortgage payment directly, even if the employer pays the servicing lender directly.

 VA Benefits.  Direct compensation, such as for a service-related disability, is acceptable, subject to documentation from the VA.  Education benefits, used to offset education expenses, are not acceptable.

 Government Assistance Programs.  Income received from government assistance programs is acceptable, subject to documentation from the paying agency, provided the income is expected to continue at least three years.  If the income is not expected to be received for at least three years, such income may be considered as a compensating factor.  (Unemployment income must be documented for two years.  Reasonable assurance of its continuance is also required.  This requirement may apply to individuals employed on a seasonal basis, such as farm workers, resort employees, etc.)

Interest and Dividends.  Interest and dividend income may be used, provided that documentation (tax returns or account statements) supports a two-year history of receipt.  This income must be averaged over the two years.  Any funds derived from these sources and required for the cash investment must be subtracted before the projected interest or dividend income is calculated.

 Mortgage Credit Certificates.  If a government entity subsidizes the FHA mortgage payments, either through direct payments or through tax rebates, these payments can be considered as acceptable income if verified in writing.  Either type of subsidy may be added to gross income or may be used to directly offset the FAHA mortgage payment before calculating the qualifying ratios.

Qualifying Rental Income.  Rent received for properties owned by the FHA mortgage applicant is acceptable if the FHA mortgage  lender can document that the rental income is stable.  Examples of stability may include a current lease, an agreement to lease, or a rental history over the previous 24 months that is free of unexplained gaps greater than three months.  (Student, seasonal, or military renters, or property rehabilitation would provide such an explanation).  A separate schedule of real estate is not required for rental properties, provided all properties are shown on the URLA.

 If the FHA Mortgage applicant resides in one or more units of a multiple-unit property and charges rent to tenants of other units, that rent may be used for qualifying purposes.  However, projected rent of additional units only and not the owner-occupied unit(s) may be considered gross income only after deducting the HOC’s vacancy and maintenance factor.  They may not be used as a direct offset to the FHA mortgage payments. 

 Income from roommates in a single-family property to be occupied as the FHA mortgage applicants primary residence is not acceptable.  Rental income from boarders is acceptable if the boarders are related by blood, marriage, or law.  The rental income may be considered effective income if shown on the borrower's tax returns.  Otherwise, the income only may be considered a compensating factor and must be documented adequately by the lender.

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