We’ve gotten several questions lately from readers about FHA loans, government assistance and Section 8 income. What does the FHA loan rulebook say about government assistance and Section 8 income used to qualify for an FHA guaranteed home loan?
When it comes to government assistance, FHA loan rules found in HUD 4155.1, Chapter Four say, “Income received from government assistance programs is acceptable for qualifying, as long as the paying agency provides documentation indicating that the income is expected to continue for at least three years.” The continuation of the income is key, so borrowers using government assistance income to qualify should be prepared to submit documentation of the income according to the lender’s requirements.
Borrowers should know that FHA loan rules also address government assistance that isn’t expected to last three years or more. According to Chapter Four, “If the income will not be received for at least three years, it may be considered as a compensating factor.”
There’s also a section that addresses unemployment benefits. “Unemployment income must be documented for two years, and there must be reasonable assurance that this income will continue. This requirement may apply to seasonal employment.”
When reviewing the rules for Section 8 income, we learn the following from HUD 4155.1 Chapter Four:
“A monthly subsidy may be treated as income if a borrower is receiving subsidies under the housing choice voucher home ownership option from a Public Housing Agency. Continuation of the home ownership voucher subsidy beyond the first year is subject to Congressional appropriation, however, FHA has agreed that it will assume, for the purposes of underwriting, that the subsidy will continue for at least three years.”
FHA loan rules also mention considerations for how the subsidy is paid out. “If the borrower is receiving the subsidy directly, the amount received is treated as income. The amount received may also be treated as non-taxable income and ‘grossed up’ by 25%, which means that the amount of the subsidy, plus 25% of that subsidy may be added to the borrower’s income from employment and/or other sources.”
Furthermore, “Lenders may treat this subsidy as an offset to the monthly mortgage payment (i.e. reduce the monthly mortgage payment by the amount of the home ownership assistance payment before dividing by the monthly income to determine the payment-to-income and debt-to-income ratios).”
FHA loan rules even address the procedure for payment of the subsidy. “As the subsidy payment must not pass through the borrower’s hands, the assistance payment must be
• paid directly to the servicing lender, or
• placed in an account that only the servicing lender may access.
Note: Assistance payments made directly to the borrower must be treated as income.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at www.FHA.com, a private company and not a government website.