August 22, 2022
Back in 2017, we published an article examining the FHA loan rules for income. As we noted back then, not every home loan applicant has the same type of employment, compensation, or schedule of compensation.
That means a participating FHA lender must have rules that govern how/if certain types of income may be included for the purpose of determining a borrower’s monthly gross income.
That information is needed to calculate the debt-to-income ratio your lender must have to help approve the loan.
FHA Loan Rules For “Primary Employment”
HUD 4000.1, the FHA Single-Family Lender’s Handbook, contains guidance for the lender to review hourly income, salary, and part-time income.
The section that includes these guidelines states that the lender is responsible for examining earnings from the home loan applicant’s “primary employment” and defines it as follows:
“Primary Employment is the Borrower’s principal employment, unless the income falls within a specific category identified below. Primary employment is generally full-time employment and may be either salaried or hourly.”
Salary Earnings: “Current Pay” Versus “Projected Pay”
According to HUD 4000.1, FHA loan applicants who earn a salary will have their current pay evaluated. “For employees who are salaried and whose income has been and will likely be consistently earned, the Mortgagee must use the current salary to calculate Effective Income.”
Reviewing the rules since we wrote the original article, we note that it is still true that for FHA purchase loans, your “projected income” is likely not to be used to calculate the debt to income ratio.
An “in-the-future” promotion or anticipated promotion may not necessarily help when it comes to your loan officer’s debt calculation. In short, what you have been earning, and what you currently earn will be the benchmarks for your loan officer.
FHA Loan Rules For Hourly Employees, Part-Time Employment
HUD 4000.1 has a section addressing income requirements for borrowers with hourly employment. In 2017, the rules stated:
“For employees who are paid hourly, and whose hours do not vary, the Mortgagee must consider the Borrower’s current hourly rate to calculate Effective Income.
For employees who are paid hourly and whose hours vary, the Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use the most recent 12-month average of hours at the current pay rate.”
These rules still apply, but how does the FHA define part time labor?
“Part-Time Employment refers to employment that is not the Borrowers primary employment and is generally performed for less than 40 hours per week…The Mortgagee may use Employment Income from Part-Time Employment as Effective Income if the Borrower has worked a part-time job uninterrupted for the past two years and the current position is reasonably likely to continue.”
FHA Loan Rules For Overtime, Bonus Payment
FHA loan rules in 2017 are the same as now, in that overtime and bonus income from employment may also be included for employees, provided it meets FHA loan standards.
Typically this income must be earned for the past two years. The key is to show that overtime or bonuses have been a consistent part of the employee’s earnings.
Ask your loan officer if you aren’t sure how these loan rules apply to your current transaction.
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.
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