May 20, 2011
FHA applicants come from a wide range of backgrounds, and no two house hunters have exactly the same circumstances. Some borrowers bring a large down payment to the transaction, while others may need down payment assistance (as permitted by FHA guidelines) and help finding just the right type of FHA mortgage. When it comes to verifiable income, it’s the same–borrowers come to the FHA loan application process with a diverse range of income sources.
A common question about FHA loans and effective income sources has to do with the nature of that income. Can a potential FHA borrower list money from public assistance, foster care, disability payments or other types of non-taxable income? Will an FHA-approved lender be able to use this income in calculating the borrower’s debt-to-income ratio?
As with many such questions, the FHA has an answer that allows some flexibility for the lender. According to the FHA rules, “Such forms of income may be considered as effective income if the lender can document the stability of the income and its likelihood of extending for at least the first three years of the mortgage” FHA guidelines add that a source of income that is tax-free has additional benefits. “The amount of continuing tax savings attributable to the non-taxable income source may be added to the borrower’s gross income.”
There are caveats to this. The FHA rulebook states the percentage of income added in such cases “may not exceed the appropriate tax rate for that income amount, and no additional allowances for dependents are acceptable.” The FHA requires the loan officer to document and justify any adjustments made in these cases, and the calculations for these types of adjustments must use the tax rate for last year’s income or 25% for those who were not required to file a tax return last year.
Doing the math on non-taxable income can be confusing. It’s always best to compare notes with a lender or credit counselor if you’re planning on running the numbers yourself in order to plan budgets and prepare finances for the added responsibility of an FHA mortgage.
Nothing is worse than a miscalculation when it comes to long-term budget preparation. An FHA-approved credit counselor can help sort through these complex issues and make sure your calculations match those the lender may come up with when processing the loan paperwork. You can find an approved housing counseling agency at the Department of Housing And Urban Development’s website http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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