Articles in Category: Debt Ratios

February 29, 2016

FHA Loan Rules in HUD 4000.1: Gaps In Employment, Temporary Reductions of Income

HUD 4000.1 is the FHA loan rule book for single family home loans and refinance loans. This rule book includes instructions to the lender on how to process FHA loan applications and how the lender should treat specific circumstances that can affect a borrower’s chances for FHA loan approval. Naturally these rules are FHA loan minimum standards and lenders may have additional requirements, but the basics for FHA loan approval are addressed. These basics include instructions to the lender on how the FHA views application issues such as having frequent gaps in employment or temporary reductions of income. What do these situations do to a borrower’s chances for FHA loan approval? HUD 4000.1 addresses the frequent gaps in employment issue directly, stating: “For Borrowers with gaps in employment of six | more...

January 6, 2016

HUD 4000.1 On Self Employment Income For FHA Home Loans

By Joe Wallace

HUD 4000.1 has rules that govern the procedures a participating FHA lender must use to verify the income of a self employed borrower or owner of a family business. The fact that an FHA mortgage loan applicant is self-employed is not a barrier to loan approval, but there are different requirements for those who own a family business or who are considered self employed. HUD 4000.1 has instructions for the lender in these cases, beginning with a definition of who is affected by these rules: “Self-Employment Income refers to income generated by a business in which the Borrower has a 25 percent or greater ownership interest. There are four basic types of business structures. They include: –sole proprietorships; –corporations; –limited liability or S corporations; and –partnerships.” How does a lender | more...

January 6, 2016

FHA Home Loan Rules For Employment: Seasonal Work, Family Businesses

By Joe Wallace

In our last blog post we discussed FHA loan rules for employment/income verification for salary, hourly, and part time work. FHA loan rules published in HUD 4000.1 also cover other aspects of income from sources such as family businesses and seasonal work. It might be easy to assume that because a borrower does work that does not last the entire year due to its seasonal nature that a lender might dismiss it–but FHA loan rules anticipate this type of income too, and have specific requirements for lenders to use when considering it for the purposes of a debt-to-income ratio calculation for an FHA mortgage. For seasonal work, FHA loan rules in HUD 4000.1 define the income as follows: “Seasonal Employment refers to employment that is not year round, regardless of | more...

December 22, 2015

HUD 4000.1 On Verifying Military Income

By Joe Wallace

FHA loan rules in HUD 4000.1 specify a variety of requirements for verifying a loan applicant’s income. Military income is one type of earnings brought to the FHA loan process–how is the lender instructed to review this type of employment and verify the earnings? According to HUD 4000.1, the process is similar to other typical types of employment, but thanks to military benefits, allowances, and special pay some additional guidance is required for the lender, starting with a basic definition of the term “military pay”. “Military Income refers to income received by military personnel during their period of active, Reserve, or National Guard service, including: –base pay –Basic Allowance for Housing –clothing allowances –flight or hazard pay –Basic Allowance for Subsistence –proficiency pay” All of those could be used to | more...

What you should know about FHA 203(h) Loans For Disaster Victims

December 22, 2015

FHA Loans, Credit Issues, And Down Payment Assistance Programs

By Joe Wallace

A reader got in touch recently to ask about FHA loan credit requirements and down payment assistance programs. That question includes the following: “…My (FICO) score was about 500 for years till I finally am working with the Lexington Law Firm that I’m paying $99 a month that I have 3 negatives I still am owing but I see that now I have my score went up to 648 which is fair but I want to know about the loan.” “Will FHA approves me to get a loan to buy a house in PA. But I’m not quite sure about AmeriDream that if I still can apply to make a down payment for the house?” FHA home loan approval depends on a variety of factors, of which FICO scores are | more...

November 13, 2015

FHA Home Loan Income Rules: Disability Income

By Joe Wallace

FHA loan rules in HUD 4000.1 have requirements for the lender to follow when it comes time to verify income. One type of income the lender may need to verify is disability income from SSI, the VA, or private disability benefits. HUD 4000.1 has this to say about this type of income, starting with a basic definition of terms: “Disability Benefits are benefits received from the Social Security Administration (SSA), Department of Veterans Affairs (VA), other public agencies, or a private disability insurance provider.” “The Mortgagee must verify and document the Borrowers receipt of benefits from the SSA, VA, or private disability insurance provider. The Mortgagee must obtain documentation that establishes award benefits to the Borrower.” The timing of such benefits is crucial, as HUD 4000.1 adds, “If any disability | more...

November 6, 2015

FHA Loan Rules For Alimony, Debt-To-Income Calculations

By Joe Wallace

A reader got in touch with us with a question about how FHA loan rules view alimony payments as part of the debt to income ratio calculation. “I pay a certain monthly amount of alimony to my ex-spouse, in addition to usual monthly credit card payments, and utilities, food, etc. I receive considerable income tax reductions due to making the alimony payments, which means that I have more disposable income to live on than I otherwise would have.” “I understand that the FHA can/will take that into account in computing my debt to income ratio. Is that true, and can you explain how it works?” FHA loan rules governing the debt-to-income ratio are found in HUD 4000.1, which has the following instructions to the lender, starting with the FHA definition | more...

October 23, 2015

FHA Loan Income Verification Rules: Seasonal Employment

By Joe Wallace

We’ve been examining FHA loan rules for income verification including requirements for full-time and part-time employment. But some FHA loan applicants have unique jobs that keep them employed on a seasonal basis. Does the FHA loan rulebook, HUD 4000.1, have provisions for these types of soon-to-be homeowners, too? According to the rules, participating FHA lenders may verify seasonal employment if it meets certain FHA standards. HUD 4000.1, Section II Part A includes the following, starting with a definition of “seasonal employment” as acceptable to the FHA: “Seasonal Employment refers to employment that is not year round, regardless of the number of hours per week the Borrower works on the job.” The FHA instructs the lender, “The Mortgagee may consider Employment Income from Seasonal Employment as Effective Income if the Borrower | more...

October 6, 2015

FHA Loans, FICO Scores, and First-Time Home Buyers

By Joe Wallace

A reader asked us a question about FHA loan FICO score requirements in the comments section recently, saying, “Im a first time home buyer and my credit score is 599 to 620 avg. from all 3 bureaus. All my credit cards are paid on time never been late. I dont have any negative accounts on my credit report. Do I have a chance of being approved?” There are two important issues to address with this reader’s question. The first is the reader’s status as a first-time home buyer. The FHA loan program itself does not provide any special status, preference, or benefits for first-time home buyers. That’s not to say that your chosen lender, won’t, or that there is not a state or local assistance program for first-time home buyers. | more...

September 24, 2015

FHA Loan Income Requirements: A Commission Question

By Joe Wallace

We recently got a question regarding commission income and how it may be reviewed by the lender. More specifically, the question is about whether the nature of the reader’s income is truly “commission income” and how the lender might view that on the FHA loan application. The reader asks: “On my pay stub next to earnings it says commission, but this actually isnt true commission pay. We arent selling anything, we deliver to stores. Its just how my company decided to pay us. So my question is do I fall under this category of commission based salary, where I would need a year of income or would that not matter in my case?” Unfortunately, the answer to this question would come from the lender. The loan officer’s job is to | more...