November 9, 2016
FHA loan rules include specific income requirements for all applicants. That can be an easy statement to misunderstand; FHA loans have no minimum or maximum income limits. Instead, the FHA loan rules state that a borrower’s debt-to-income ratio must be examined (both with and without the monthly mortgage payment factored into the equation) to see whether the borrower can realistically afford the home loan.
HUD 4000.1 has the rules for income for “forward mortgages” or new home purchases, and those rules are found on page 186. It begins by defining what the FHA describes as “effective income”:
“Effective Income refers to income that may be used to qualify a Borrower for a Mortgage. Effective Income must be reasonably likely to continue through at least the first three years of the Mortgage, and meet the specific requirements described below”.
What are those requirements? The lender is required to “…document the Borrowers income and employment history, verify the accuracy of the amounts of income being reported, and determine if the income can be considered as Effective Income in accordance with the requirements listed below. The Mortgagee may only consider income if it is legally derived and, when required, properly reported as income on the Borrowers tax returns.”
This portion of the rule book adds that negative income must be “subtracted from the Borrowers gross monthly income, and not treated as a recurring monthly liability unless otherwise noted” in HUD 4000.1
The lender is required to “verify the Borrowers most recent two years of employment and income” and document it accordingly. Furthermore, the lender must verify past employment in certain cases. But HUD 4000.1 states that direct verification of the Borrowers employment history (for the previous two years) won’t be required by FHA if all of the following conditions are met:
-The current employer confirms a two year employment history, or a paystub reflects a hiring date.
-Only base pay is used to qualify (no Overtime or Bonus Income).
-The Borrower executes IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-T, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two tax years.
If the applicant has not been employed with the same employer for the previous two years and/or not all conditions immediately above can be met, then the Mortgagee must obtain one or a combination of the following for the most recent two years to verify the applicants employment history:
-W-2s
-VOE(s)
-electronic verification acceptable to FHA
-evidence supporting enrollment in school or the military during the most recent two full years
Lender standards can and often do apply, so talk with a loan officer to see what may be additionally required.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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