June 29, 2016
We get many questions in our comments section about how FHA loan rules may apply to a specific situation with regard to employment, pay, and verifiable income.
Some potential borrowers want to know if having frequent changes of employment will negatively affect an FHA loan application (not necessarily) and others want to know if their new commission income will count towards their “effective income” (it depends on how long the commission income has been earned and whether it’s likely to continue).
Still others want to know how the question of overtime pay is handled in the FHA loan rulebook. Recently, one reader asked:
“I previously worked in law enforcement (resigned in September of 2015) and I obtained a job in another industry which pays me double my previous salary. I made about $80000 (includes $20,000 in overtime) last year which was a combination of my previous employer and current. This year Im on track to make around $85,000 ( estimated $25,000 overtime). My question is will overtime be included in my debt ratio even if it was from 2 different employers, past and present?”
The basic answer to this question is, “It depends”. FHA loan rules in HUD 4000.1, page 189 addresses these and similar issues. There we find the following instructions to the lender:
“The Mortgagee may use Overtime and Bonus Income as Effective Income if the Borrower has received this income for the past two years and it is reasonably likely to continue. Periods of Overtime and Bonus Income less than two years may be considered Effective Income if the Mortgagee documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue.”
So if the reader’s overtime income has been going on for at least one year prior to the loan application AND the lender is satisfied that it is likely to continue, it’s possible that the overtime might count towards the borrower’s debt to income ratio as part of his or her “verifiable income”.
However, if the overtime has not been earned for at least one year (reference the HUD 4000.1 quote above) the lender may have no choice but to reject the overtime based on the reading above.
It’s also worth mentioning that FHA loan rules aren’t the only ones that may affect the outcome in a situation like this. Lender standards may also apply and if the lender requires more time on the job with overtime earnings, the FHA minimums in this case may not help the borrower’s cause. However, there many variables and a borrower shouldn’t assume the loan can’t be approved until discussing the particulars with a lender.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
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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