March 16, 2016
It’s easy for borrowers to get nervous about their debt to income ratio when trying to qualify for an FHA mortgage. Some, who may be concerned that their ratio isn’t good enough may look to expected raises, performance bonuses, or other types of future earnings that haven’t begun yet in hopes that those extra earnings might give them a better chance at loan approval.
But what do FHA loan rules say about this type of expected income? The issue is addressed on page 2o7 of HUD 4000.1, starting with the FHA definition of expected income, provided to clear up any confusion over what may or may not be counted as such:
“Expected Income refers to income from cost-of-living adjustments, performance raises, a new job, or retirement that has not been, but will be received within 60 Days of mortgage closing.”
Expected income has some specific parameters it must meet. “The Mortgagee may consider Expected Income as Effective Income except when Expected Income is to be derived from a family-owned business.” That is fairly straightforward; “effective income” is the type of earning the lender will use to calculate debt to income ratio data.
But what is required in order to prove the borrower will receive this income? “The Mortgagee must verify and document the existence and amount of Expected Income with the employer in writing and that it is guaranteed to begin within 60 Days of mortgage closing. For expected Retirement Income, the Mortgagee must verify the amount and that it is guaranteed to begin within 60 Days of the mortgage closing.”
Based on the reading of FHA loan rules we see here, it’s obvious that some additional time may be needed in order to get the required paperwork from the employer. Borrowers should anticipate this and try to get the documentation needed as early as possible in the FHA loan approval process.
Remember, the timing of the anticipated income is very important. If the income won’t be received within 60 of loan closing, the lender can’t accept it as part of the borrower’s debt to income calculations.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:
http://www.fha.com/fha_loan_limits_widget
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
Browse by Date: