January 6, 2016
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 the number of hours per week the Borrower works on the job.”
When does seasonal work count toward the borrower’s debt-to-income ratio? “The Mortgagee may consider Employment Income from Seasonal Employment as Effective Income if the Borrower has worked the same line of work for the past two years and is reasonably likely to be rehired for the next season. The Mortgagee may consider unemployment income as Effective Income for those with Effective Income from Seasonal Employment.”
The lender will need documentation of seasonal income. “For seasonal employees with unemployment income, the Mortgagee must document the unemployment income for two full years and there must be reasonable assurance that this income will continue.” That continuation of the income is a key factor in using it to approve the loan.
When it comes to FHA mortgage loan applicants employed by a family business, HUD 4000.1 states that there’s an important distinction to be made between being an employee and an owner/operator. Self-employed borrowers have a whole different set of requirements for FHA loans–this post is concerned primarily with those who do not own their own business, but may be employees of someone who does.
“Family-Owned Business Income refers to Employment Income earned from a business owned by the Borrowers family, but in which the Borrower is not an owner.”
HUD 4000.1 says the lender is required to verify and document “…that the Borrower is not an owner in the family-owned business by using official business documents showing the ownership percentage. Official business documents include corporate resolutions or other business organizational documents, business tax returns or Schedule K-1(IRS Form 1065), U.S. Return of Partnership Income, or an official letter from a certified public accountant on their business letterhead.”
A borrower’s tax returns may be required in cases like these. “In addition to traditional or alternative documentation requirements, the Mortgagee must obtain copies of signed personal tax returns or tax transcripts.”
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.
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