FHA home loan rules permit the use of disability benefits to financially qualify for the loan. All income used in the lender’s debt ratio calculations must be verifiable, which means it must be a stable source of income and is likely to continue.
Some borrowers worry that their disability income won’t be counted for the purposes of loan approval, but if that income meets FHA standards, there shouldn’t be any problem. Those standards are found in HUD 4000.1 and start with a basic definition:
“Disability Benefits are benefits received from the Social Security Administration (SSA), Department of Veterans Affairs (VA), other public agencies, or a private disability insurance provider. “
These benefits must continue for at least three years into the mortgage to be counted as verifiable income. The lender is required to verify the benefits with documentation from the agency issuing the benefits.
That’s where some borrowers get nervous-what if the documentation from the issuing agency does not include an expiration date of any kind?
According to HUD 4000.1, “If the Notice of Award or equivalent document does not have a defined expiration date, the Mortgagee may consider the income effective and reasonably likely to continue. The Mortgagee may not rely upon a pending or current re-evaluation of medical eligibility for benefit payments as evidence that the benefit payment is not reasonably likely to continue.”
That’s an important sticking point for the lender-cases where the benefits are being re-evaluated to see if they should continue. It’s best not to rely on this kind of income for the purposes of loan approval if the benefit is under review at loan application time.
Borrowers who need that income to continue in order to afford the loan should consider waiting until after the benefits review process is complete to fill out paperwork for the FHA mortgage loan; this insures that the borrower knows for sure the benefits will continue.
Some borrowers may be receiving disability benefits from a private agency rather than state or federal benefits. In such cases, FHA loan rules instruct the lender:
“For private disability benefits, the Mortgagee must obtain documentation from the private disability insurance provider showing the amount of the assistance and the expiration date of the benefits, if any, and one of the following documents:
- federal tax returns;
or themost recent bank statement evidencing receipt of income from the insurance provider.”
That verification process will determine whether the private benefits are able to be counted as verifiable income. Talk to your loan officer if you are not sure how these FHA loan rules apply to your transaction.