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Gaps In Employment, Reductions of Income: FHA Loan Rules

FHA loan rules in HUD 4000.1 for single family home loans and refinance loans include instructions for the lender on how to verify a borrower’s income and employment. There are several reasons why this verification must be made, but one important one is to insure the income used to qualify for an FHA loan is stable, reliable, and likely to continue.

The lender is basically looking for indications that this is so, but how does the loan officer interpret financial setbacks such as gaps in employment or reductions of income? What are the FHA requirements in this area?

HUD 4000.1 addresses these issues. For example, when it comes to certain gaps in a borrower’s employment history, the following may apply:

“For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrowers current income as Effective Income if it can verify and document that…the Borrower has been employed in the current job for at least six months at the time of case number assignment; and a two year work history prior to the absence from employment using standard or alternative employment verification.”

Borrowers should know that a lender’s standards may also apply above and beyond this rule.

For reductions of income, HUD 4000.1 tells the lender, “For Borrowers with a temporary reduction of income due to a short-term disability or similar temporary leave, the Mortgagee may consider the Borrowers current income as Effective Income, if it can verify and document that:

-the Borrower intends to return to work;
-the Borrower has the right to return to work; and
-the Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstance.”

If the FHA loan applicant is due to return to work after a period of leave, HUD 4000.1 states, “For Borrowers returning to work before or at the time of the first Mortgage Payment due date, the Mortgagee may use the Borrowers pre-leave income.”

In cases where the FHA loan applicant is returning to work after the first FHA loan payment comes due, “the Mortgagee may use the Borrowers current income plus available surplus liquid asset Reserves, above and beyond any required Reserves, as an income supplement up to the amount of the Borrowers pre-leave income. The amount of the monthly income supplement is the total amount of surplus Reserves divided by the number of months between the first payment due date and the Borrowers intended date of return to work.”

If any of the above applies in your circumstances, the lender may request documentation in writing to verify return to work dates or other information.

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