Not every home loan applicant has the same type of employment, compensation, or schedule of compensation. That’s why FHA home loan rules in HUD 4000.1, the FHA single family home loan handbook, include different instructions to the lender for a diverse range of income sources.
FHA Loan Rules For “Primary Income”
HUD 4000.1 has sections for hourly income, salary, and part-time income. The section that includes these guidelines states that the lender is responsible for examining earnings from the home loan applicant’s “primary employment” and defines it as follows:
“Primary Employment is the Borrowers principal employment, unless the income falls within a specific category identified below. Primary employment is generally full-time employment and may be either salaried or hourly.”
“Current Pay” Versus “Projected Pay”
According to HUD 4000.1, FHA loan applicants who earn a salary will have their current pay evaluated. “For employees who are salaried and whose income has been and will likely be consistently earned, the Mortgagee must use the current salary to calculate Effective Income.”
That means that projected income is likely not to be used to calculate the debt to income ratio–an “in-the-future” promotion or anticipated promotion may not necessarily help when it comes to the debt to income calculation. However depending on circumstances, it may be wise to speak to the lender about such future developments as a possible compensating factor.
FHA Loan Rules For Hourly Employees, Part-Time Employment
HUD 4000.1 does address income requirements for borrowers with hourly employment:
“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.”
As you can see, there are different issues for some hourly employees. And then there are the FHA requirements for those earning part-time income:
“Part-Time Employment refers to employment that is not the Borrowers primary employment and is generally performed for less than 40 hours per week…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.”
FHA Loan Rules For Overtime, Bonus Payment
Overtime and bonus income from employment may also be included for employees, provided it meets FHA loan standards.
HUD 4000.1 instructs 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.”
There are also rules that govern how the lender is to proceed if overtime or bonuses actually decrease from the prior year:
“For employees with Overtime or Bonus Income, the Mortgagee must average the income earned over the previous two years to calculate Effective Income. However, if the Overtime or Bonus Income from the current year decreases by 20 percent or more from the previous year, the Mortgagee must use the current year’s income.”