August 17, 2016
A reader got in touch with us to ask a question about FHA standards for income. “I am on contract and my lender just told me that I might not be qualify for FHA because of my income. Is that one of the requirements for FHA?”
FHA loans require the borrower to financially qualify for the loan, which includes the lender making a determination about the borrower’s employment situation. While this reader question is far too general to answer with regards to the reader’s specific circumstances, we can observe the following about FHA home loans based on a reading of HUD 4000.1:
The lender is required to verify a borrower’s income to insure it is stable, reliable, and likely to continue. Income that is deemed “verifiable” is allowed to be included in the borrower’s debt-to-income ratio.
Self-employed and contract employed home loan applicants may find their income requires additional documentation and is subject to review based on specific criteria such as the nature and duration of the employment and whether it is likely to continue for the first three years of the loan term.
In general, FHA loan rules in HUD 4000.1 state:
“The Mortgagee must document the Borrowers income and employment history, verify the accuracy of the amounts of income being reported, and determine if the income can be considered as Effective Income in accordance with the requirements listed below.
The Mortgagee may only consider income if it is legally derived and, when required, properly reported as income on the Borrowers tax returns.
Negative income must be subtracted from the Borrowers gross monthly income, and not treated as a recurring monthly liability unless otherwise noted.”
Contract work may (or may not, depending on circumstances) require the borrower to apply as a self-employed person if the nature of the contract work requires it. Self-employed borrowers will find the following rules in HUD 4000.1 applicable to them:
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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