November 2, 2017
Are there any income documentation rules for FHA loans? We have been examining this question, referring to the FHA loan handbook (HUD 4000.1) to see what the lender must do when reviewing a borrower’s income. The lender must calculate the applicant’s debt-to-income ratio using only verifiable income, and there are specific procedures your loan officer must use to do this.
Those procedures can vary depending on the nature of your income. Are you salaried, hourly, commission, or contract? Depending on your payment arrangements, the lender must calculate the income accordingly.
FHA Loan Applicants With Hourly Income
HUD 40001. tells the lender that for hourly income, the loan officer must determine whether the hours of employment vary or not. If they do not vary, the lender can use the current rate of pay times the number of hours worked.
For employees who have hours which DO vary, HUD 4000.1 instructs your loan officer:
“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.”
FHA Loan Rules For Part-Time Income
For loan applicants who have part-time jobs, FHA loan rules tell the loan officer, “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.”
When it comes to calculating the income, the lender must “average the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use a 12-month average of hours at the current pay rate.”
FHA Loan Rules For Calculating Salary Income
For salaried borrowers, the lender must use the borrower’s current salary to calculate the income. Certain bonuses or other additional pay may be allowed (see below) if that pay meets certain FHA requirements. Lender standards may also apply.
Overtime And Bonus Pay: Is It Allowed To Be Included In the Lender’s Calculations?
HUD 4000.1 says overtime and bonus pay can be included in these calculations IF certain conditions apply. “The Mortgagee may use Overtime and Bonus Income as Effective Income if the Borrower has received this income for the past two years and it is reasonably likely to continue.”
There are also exceptions-overtime and bonus Income earned for less than two years “may be considered Effective Income if the Mortgagee documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue”.
Again, lender standards may also apply. Check with your loan officer to see what’s possible in your situation.
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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