May 4, 2017
What are the rules for using part time income to qualify for FHA loans? A reader asked us a question on that topic in our comments section this week:
“I have a client that worked full time for a company for eight years. In the last eight months he went to half time. Why cant we use this income since hes been at the same employer for more than 2 years?”
Instructions to the lender on this issue are found in HUD 4000.1. There, we learn that for all income sources, the lender is required to do some calculations.
“For employees who are paid hourly, and whose hours do not vary, the Mortgagee must consider the Borrowers current hourly rate to calculate Effective Income. For employees who are paid hourly and whose hours vary, the Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use the most recent 12-month average of hours at the current pay rate.”
But calculating the effective income is only part of the lender’s job. In cases where a borrower has part time income, FHA loan rules state clearly:
“The Mortgagee may use Employment Income from Part-Time Employment as Effective Income if the Borrower has worked a part-time job uninterrupted for the past two years and the current position is reasonably likely to continue.”
There’s more guidance to the lender in HUD 4000.1 in this area:
“The Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use a 12-month average of hours at the current pay rate.”
A literal reading of HUD 4000.1 on this topic implies that the nature of the part-time income is in question unless it meets the above criteria.
The fact that the borrower in the reader question is employed at the same company but has moved from full to part time status may not be directly addressed in HUD 4000.1 but could be addressed by lender standards instead. However, the requirements listed above would generally apply. The time spent on the job is an important factor.
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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