September 20, 2018
What do borrowers need to know about FHA home loans and income verification requirements? The short answer is that it depends on several factors including the nature of the borrower’s job.
Why is this true? Why isn’t there a standard answer? Because there are a variety of different employment types and FHA loan rules must address them.
Self-employed borrowers are held to a different set of requirements because verifying that income requires a different set of procedures than for “traditional” employment.
Those who work in the gig economy as contractors, 1099 workers, etc. are also in a different set of circumstances than a typical 9-5 worker, so those employees need their own procedures, too.
FHA Loan Income Verification Rules
For more traditional employment, the lender may require pay stubs, tax filings, and other information. Military FHA loan applicants will submit their Leave and Earnings Statement, and may be required to provide a letter from the current command showing the military member is in good standing and has sufficient time in service remaining.
Military members do well to apply for a home loan long before their current enlistment date is up; the closer you get to retirement or re-enlistment, the question of whether your income is likely to continue becomes more important to the lender.
Verifying income requires the lender to determine that the borrower’s cash flow is stable, and likely to continue-that is why the lender would ask a military borrower to show some type of proof that they have X amount of time left to serve before reenlisting or choosing to separate from the military.
For self-employed borrowers, the lender will pay close attention to tax documents, profit-and-loss statements, and other required paperwork designed to show the borrower’s earnings over time.
Those who work in family businesses (but are not the business owner) may have to provide similar paperwork and demonstrate that they do or do not have an ownership stake in that family business.
The loan officer basically needs to show on paper that a borrower has been working steadily, that the income will continue, and that there is a track record of stable employment, upward mobility, or both.
Those who earn commission income may be required to show that the income has been earned for a minimum amount of time (two years is typical) and there is a requirement to determine how much of the FHA loan applicant’s income is derived from those commissions.
Some jobs require frequent changes of employer, so time in one position may not be the best indicator of how reliable the employment is.
In all of this, lender standards will also apply so it is best to ask the lender what that financial institution’s requirements might be. State law may also apply depending on the nature of your transaction, privacy requirements, etc.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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