FHA home loans, like other mortgages, require the lender to make sure their applicants have enough income to be able to realistically afford the loan.
This is known as “qualifying income” and the lender is only permitted to use earnings that meet FHA standards. Those paychecks must be stable, and likely to continue for the purpose of debt-to-income ratios and other loan approval procedures.
Those regulations apply regardless of whether you are buying existing construction or want to build a house on your own lot using an FHA construction loan so it’s important to be familiar with them.
Military Pay And Earnings:
Yes, military people have access to the GI Bill and the VA home loan program, why would they need an FHA home loan? There are actually many reasons, but the most important thing here is that military pay IS qualifying income but only if it meets the “likely to continue” rule.
In other words, the lender needs to know how much time remains on the current military enlistment. According to HUD 4000.1, “The Mortgagee must obtain a copy of the Borrower’s Military Leave and Earnings Statement (LES). The Mortgagee must verify the Expiration Term of Service date on the LES.”
If the Expiration Term of Service date is within the first 12 months of the Mortgage, Military Income may only be considered Effective Income if the Borrower represents their intent to continue military service.”
FHA Mortgage Loan Rules For Qualifying
There is some simple math the lender will do, comparing your monthly qualifying income to your monthly financial obligations. The money you send out each month to pay your bills cannot exceed a certain ratio compared to the money you bring home every month (qualifying income).
There are many ways of determining the suitability of your income depending on the nature of the funds and how they are paid. A pay stub, tax statements, and even deposit records may all be required.
If you are paid hourly, on commission, work a contractor job, or even if you work as a seasonal hire, there are ways the lender can use to make sure your income is reliable.
Did you know that certain kinds of income that are not job-related may still count toward your debt ratio?
Alimony and child support may be considered income, but the borrower will have to provide documentation showing the history of these payments, any court orders or agreements that codify the payments somehow, and any evidence that the income is likely to continue. The laws of your state may also have a say in how this is handled; be sure to ask.
Lender standards and not just FHA home loan rules will apply in these situations, so it’s very good to ask the loan officer what standards may be required to be met beyond the FHA home loan rules.
Certain types of self-employment income either don’t count at all (selling items on eBay or via social media platforms is one) unless it is verifiable as likely to continue and is a year old or more.
Self employment is not a barrier to loan approval in and of itself, but you will need to have records showing the consistency of your income over time.
What does NOT qualify as income? Cash earned from hobbies or one-time sales of goods or services, part-time jobs you haven’t held for more than a year, or education benefits such as the GI Bill, which do not continue indefinitely and expire within a fixed time.