FHA loan employment rules include a requirement that the FHA lender insure the borrower’s income is stable, reliable, and likely to continue. There are certain standards the FHA uses to determine this beginning with a minimum employment length.
The rules governing this are found in HUD 4000.1, beginning on page 197 where we learn, “The Mortgagee must document the Borrower’s income and employment history, verify the accuracy of the amounts of income being reported, and determine if the income can be considered as Effective Income”.
HUD 4000.1 says effective income must be legally derived and reported on the borrower’s income tax forms. But what about the borrower’s work history?
HUD 4000.1 tells the lender this is important, too-not just the amount you earn or the responsibilities you carry. “For all Employment related Income, the Mortgagee must verify the Borrower’s most recent two years of employment and income, and document” using either a traditional or alternative documentation method.
Note that the rule quoted above about verifying the last two years of employment does not mention that those two years must be with the same employer. The borrower is required to show supporting documentation such as pay stubs or other evidence that the employment has occurred over a specific range of calendar days.
In cases where the borrower has been employed for the last two years but not with the same employer, the borrower may need to submit bank statements, tax records, pay stubs or other evidence for each of the jobs held over the previous 24 months leading up to the application.
One thing the lender may need to do with employment documentation involves calculating the borrower’s debt ratio. Depending on how an employee is paid, the lender may be required to average pay over the previous two years, or document increases in pay over 12 month periods where applicable.
There are many factors in determining what application data, supporting documentation, and other evidence may be required. A borrower who is self-employed, or who earns commissions will have more complex requirements in the debt-to-income ratio calculation than someone who earns a straight salary.
Many of the same considerations listed above are applicable when a home loan applicant lists part-time income as a source of revenue; part-time employment must be documented over the last two years and be deemed likely to continue.
State law, lender requirements, and FHA loan rules may all apply when it comes to employment minimums.