August 21, 2014
When applying for an FHA loan, many borrowers want to know if certain types of income will count towards their debt to income ratio. The debt to income ratio is calculated by the lender using income that qualifies according to the loan rules spelled out in HUD 4155.1.
Not all income can be used–some types of income are not verifiable because the income isn’t considered stable, reliable, or likely to continue. But what does the FHA loan rulebook say about retirement pay and Social Security income?
When it comes to retirement pay, the lender is required to document the income and its source. There’s also a consideration as to how long that pay might continue according to HUD 4155.1 Chapter Four Section D, which states:
“Retirement income must be verified from the former employer, or from Federal tax returns. If any retirement income, such as employer pensions or 401(k) distributions, will cease within the first full three years of the mortgage loan, the income may only be considered as a compensating factor.”
That’s an important factor to keep in mind when budgeting for your loan and trying to figure out whether your debt to income ratio is high or low at the time of the application.
For Social Security Income (SSI), Chapter Four has this to say:
“Social Security income must be verified by the Social Security Administration (SSA) or from Federal tax returns. If any benefits expire within the first full three years of the loan, the income may only be considered as a compensating factor.”
Notice that the same rules apply for SSI as for retirement income–if the money is due to stop coming in within the first 36 months of the loan, that income is only to be counted as a compensating factor rather. Chapter Four also adds, “The lender must obtain a complete copy of the current awards letter. Not all Social Security income is for retirement-aged recipients; therefore, documented continuation is required. Some portion of Social Security income may be “grossed-up” if deemed nontaxable by the IRS.”
To learn more about the lender’s requirements for documentation in these two areas, speak to a loan officer.
Do you have questions about FHA home loans or FHA refinance loans? Ask us in the comments section.