What happens if a borrower fills out an FHA loan application while having a temporary reduction of income either on the record or ongoing during the application process? Does the FHA loan rule book, HUD 4000.1, address these situations?
Fortunately, yes. There are many reasons why a loan applicant might experience a temporary reduction of income-short term disability, for example. Maternity leave. Temporary leaves of absence, sabbaticals, etc. According to page 206 of HUD 4000.1, FHA loan rules in this area include the following:
“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.”
So we see that having a reduction of income isn’t necessarily the end of the road for an FHA loan applicant. But the issue of returning to work is an important factor, and timing of that return is also addressed in the FHA loan rules.
“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.”
And what about those who must return to work after the mortgage has closed and the first mortgage payment comes due?
“For Borrowers returning to work after the first Mortgage Payment due date, 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.”
Lenders will require written documentation. The following are required for FHA loan borrowers on temporary leave, according to page 206:
– a written statement from the Borrower confirming the Borrowers intent to return to work, and the intended date of return;
– documentation generated by current employer confirming the Borrowers eligibility to return to current employer after temporary leave; and
– documentation of sufficient liquid assets, in accordance with Sources of Funds, used to supplement the Borrowers income through intended date of return to work with current employer.
Additional lender standards may apply above and beyond these guidelines. You may be required to provide detailed information about the nature and duration of your annual income pre-leave and other data as required by your loan officer.