October 19, 2017
How does FHA deal with a borrower’s financial hardship? That is a question we began addressing in a previous blog post, starting with an examination of the FHA attitude toward things like public assistance income, credit counseling programs, etc.
In general, FHA loan rules do not allow borrowers to have public assistance income held against them as a liability, and participating in a credit counseling program is not grounds for denying an FHA mortgage loan. All income, including public assistance, must meet FHA loan standards for dependability and the likelihood of that income continuing.
But just because the income is from public assistance, Social Security, etc. does not mean that income is not a valid means of financially qualifying for an FHA mortgage.
Borrowers With Temporary Reductions of Income
One financial hardship is a temporary loss or reduction of income. FHA loan rules anticipate these situations and have instructions for the lender to help determine a borrower’s actual credit worthiness. Page 206 of HUD 4000.1 explains:
“For Borrowers with a temporary reduction of income due to a short-term disability or similar temporary leave, the Mortgagee may consider the Borrower’s 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.”
Divorce, Alimony, and Child Support
In cases where divorce may create a financial hardship which is addressed with alimony and/or child support payments, a borrower may qualify for an FHA mortgage if the payments can be documented as required in HUD 4000.1:
“The Mortgagee must obtain a fully executed copy of the Borrower’s final divorce decree, legal separation agreement, court order, or voluntary payment agreement with documented receipt. When using a final divorce decree, legal separation agreement or court order, the Mortgagee must obtain evidence of receipt using deposits on bank statements; canceled checks; or documentation from the child support agency for the most recent three months that supports the amount used in qualifying.”
How much documentation/payment history is required in such cases? HUD 4000.1 says a voluntary payment agreement must be documented with 12 months of canceled checks, deposit slips, or tax paperwork.
“The Mortgagee must provide evidence that the claimed income will continue for at least three years. The Mortgagee may use the front and pertinent pages of the divorce decree/settlement agreement and/or court order showing the financial details.”
Obviously these are not the only instances where financial hardship or income issues will arise. But these rules give a good indication of the overall FHA approach to financial hardship when applying for an FHA mortgage loan. Don’t assume you won’t qualify for an FHA mortgage just because your financial situation includes some or all of the situations mentioned here-it is best to discuss your circumstances with a loan officer to determine what may be possible.
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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