| FHA EFFECTIVE INCOME | | | | registered nurse may have worked 24 hours per |
| FHA home loans are the easiest home loans to | | | | week for the last year. Although this job requires |
| qualify for below we will explain how to FHA | | | | less than 40 hours of work per week, it is the FHA |
| calculates income for FHA Mortgage applicants. You | | | | mortgage applicant primary employment and is to |
| will also find procedures for calculating effective | | | | be considered effective income. |
| income, and requirements for establishing income | | | | We recognize that many low- and |
| stability. | | | | moderate-income families rely on part-time and |
| But first here is a brief description of FHA home | | | | seasonal income for day-to-day needs. Lenders |
| loan advantages | | | | must not restrict the consideration of such income |
| Minimal Down Payment and Closing Costs. | | | | sources in qualifying these borrowers. |
| - Down payment less than 3.5% of Sales Price | | | | Military Income. FHA mortgage applicants may use |
| - Gift for down payment and closing costs allowed. | | | | military income: In addition to base pay, military |
| - No reserves or required. | | | | personnel may be entitled to additional forms of |
| - FHA regulated closing costs. | | | | pay. Income from variable housing allowances, |
| - Seller can credit up to 6% of sales price towards | | | | clothing allowances, flight or hazard pay, rations, and |
| buyers costs. | | | | proficiency pay is acceptable, provided its probability |
| Easier Credit Qualifying Guidelines such as: | | | | of continuance is verified in writing. An additional |
| - Minimum FICO credit score of 540. | | | | consideration may be the tax-exempt nature of |
| - FHA will allow a home purchase 2 years after a | | | | some of these payments (see paragraph Q for |
| Bankruptcy. | | | | additional information.) |
| - FHA will allow a home purchase 3 years after a | | | | Commission Income. FHA mortgage applicants |
| Foreclosure. | | | | may us commission income but it must be averaged |
| Easier Debt Ratio & Job Requirement Guidelines | | | | over the previous (2) two years. The FHA |
| such as: | | | | mortgage applicant must provide copies of signed tax |
| - Higher Debt Ratio's than other home loan programs. | | | | returns for the last (2) two years, along with the |
| - Less than two years on the job is allowed. | | | | most recent pay stub. (Unreimbursed business |
| - Self-Employed individuals o.k. | | | | expenses must be subtracted from gross income.) |
| Calculating Income for an FHA Mortgage loan | | | | FHA mortgage applicants whose commission income |
| FHA looks at the anticipated amount of income, and | | | | shows a decrease from one year to the next require |
| the likelihood of its continuance, must be established | | | | significant compensating factors to allow for loan |
| to determine an FHA mortgage applicants capacity to | | | | approval. FHA mortgage applicants with commission |
| repay mortgage debt. The FHA mortgage applicants | | | | income received for more than (1) one but less than |
| Income may not be used in calculating the FHA | | | | (2)two years may be considered favorably provided |
| mortgage applicants income ratios if it comes from | | | | the underwriter is able to make a sound |
| any source that cannot be verified, is not stable, or | | | | rationalization for acceptance and can document the |
| will not continue. This section describes acceptable | | | | likelihood of continuance. |
| types of income, procedures for calculating effective | | | | FHA mortgage applicants who have commission |
| income, and requirements for establishing income | | | | income earned for less than (1)one year are not |
| stability. | | | | considered effective income. Exceptions may be |
| STABILITY OF INCOME. FHA does not impose a | | | | made for situations in which the FHA mortgage |
| minimum length of time a FHA mortgage applicants | | | | applicants compensation was changed from a salary |
| must have held a position of employment to be | | | | to commission within a similar position with the same |
| eligible. However, the FHA mortgage applicant must | | | | employer. A FHA mortgage applicant also may |
| verify the FHA mortgage applicants employment for | | | | qualify when the portion of earnings not attributed to |
| the most recent (2) two full years. If a FHA | | | | commissions would be sufficient to qualify the |
| mortgage applicant indicates he or she was in school | | | | borrower for the FHA mortgage. |
| or in the military during any of this time, the FHA | | | | Retirement and Social Security Income. |
| mortgage applicant must provide evidence supporting | | | | Retirement and social security income require |
| this claim, such as college transcripts or discharge | | | | verification from the source (former employer, Social |
| papers. The FHA mortgage applicant also must | | | | Security Administration) or federal tax returns. If |
| explain any gaps in employment spanning one month | | | | any benefits expire within the first full three years, |
| or more. Allowances for seasonal employment, such | | | | the income source may be considered only as a |
| as is typical in the building trades, etc., may be made | | | | compensating factor. |
| if documented by the FHA mortgage lender. | | | | Child Support, Alimony, or Maintenance Income. |
| To analyze and document the probability of | | | | Income in this category may be considered as |
| continued employment, FHA mortgage lenders must | | | | effective if such payments are likely to be |
| examine the FHA mortgage applicants past | | | | consistently received for the first three years of the |
| employment record, qualifications for the position, | | | | FHA mortgage. The FHA mortgage applicant must |
| previous training and education, and the employer's | | | | provide a copy of the final divorce decree, legal |
| confirmation of continued employment. An FHA | | | | separation agreement, or voluntary payment |
| mortgage applicant who changes jobs frequently | | | | agreement, as well as evidence that payments have |
| within the same line of work, but continues to | | | | been received during the last twelve months. |
| advance in income or benefits, should be considered | | | | Acceptable evidence of payment regularity includes |
| favorably. In this analysis, income stability takes | | | | cancelled checks, deposit slips, tax returns, and court |
| precedence over job stability. | | | | records. Periods less than twelve months may be |
| In some cases, an FHA mortgage applicant may | | | | acceptable, provided the payer’s ability and |
| have recently returned to the work force after an | | | | willingness to make timely FHA mortgage payments |
| extended absence. In these circumstances, the | | | | is adequately documented by the FHA mortgage |
| borrower's income may be considered effective and | | | | lender. |
| stable provided the following conditions apply: | | | | Notes Receivable. A copy of the note must be |
| The FHA mortgage applicant has been employed in | | | | presented to establish the amount and length of |
| the current job for six months or more, and | | | | payment. The FHA Mortgage applicant also must |
| 1. Acceptable documentation includes traditional | | | | provide evidence that these payments have been |
| employment verifications, copies of W-2's or | | | | received consistently for the last twelve months, |
| paystubs. | | | | which may include deposit slips, cancelled checks, or |
| An example of an acceptable employment situation | | | | tax returns. If the borrower is not the original |
| includes a person that took several years off of | | | | payee on the note, the FHA mortgage lender must |
| work to raise children and then returned to the | | | | also establish that the FHA Mortgage applicant is now |
| workforce. Situations not meeting the criteria listed | | | | a holder in due course and able to enforce the note. |
| above may be considered as compensating factors | | | | Employer Differential Payments. If the employer |
| only. | | | | subsidizes the FHA mortgage payments through |
| SALARIES, WAGES, AND OTHER FORMS OF | | | | direct payments, the amount of the payments is |
| EFFECTIVE INCOME The income of each FHA | | | | considered gross income; it may not be used to |
| mortgage applicant r to be obligated for the | | | | offset the FHA mortgage payment directly, even if |
| mortgage debt must be analyzed to determine | | | | the employer pays the servicing lender directly. |
| whether it can reasonably be expected to continue | | | | VA Benefits. Direct compensation, such as for a |
| through at least the first three years of the | | | | service-related disability, is acceptable, subject to |
| mortgage loan. If the borrower intends to retire | | | | documentation from the VA. Education benefits, |
| during this period, the effective income must be the | | | | used to offset education expenses, are not |
| amount of documented retirement benefits, social | | | | acceptable. |
| security payments, or other payments expected to | | | | Government Assistance Programs. Income |
| be received in retirement. No inquiry may be made | | | | received from government assistance programs is |
| regarding possible future maternity leave. | | | | acceptable, subject to documentation from the |
| In most cases, the FHA mortgage applicant income | | | | paying agency, provided the income is expected to |
| will be limited to salaries or wages. Income from | | | | continue at least three years. If the income is not |
| other sources can be included as effective income | | | | expected to be received for at least three years, |
| with proper verification by the FHA mortgage | | | | such income may be considered as a compensating |
| lender. Procedures for analyzing other acceptable | | | | factor. (Unemployment income must be |
| income sources besides salaries and wages are | | | | documented for two years. Reasonable assurance |
| described below: | | | | of its continuance is also required. This requirement |
| Overtime and Bonus Income. Both overtime and | | | | may apply to individuals employed on a seasonal |
| bonus income may be used to qualify if the FHA | | | | basis, such as farm workers, resort employees, etc.) |
| mortgage applicant has received such income for the | | | | Interest and Dividends. Interest and dividend income |
| past two years and it is likely to continue. The FHA | | | | may be used, provided that documentation (tax |
| mortgage lender must develop an average of bonus | | | | returns or account statements) supports a two-year |
| or overtime income for the past two years, and the | | | | history of receipt. This income must be averaged |
| employment verification must not state that such | | | | over the two years. Any funds derived from these |
| income is unlikely to continue. Periods of less than | | | | sources and required for the cash investment must |
| two years may be acceptable provided the FHA | | | | be subtracted before the projected interest or |
| Mortgage lender justifies and documents in writing | | | | dividend income is calculated. |
| the reason for using the income for qualifying | | | | Mortgage Credit Certificates. If a government |
| purposes. | | | | entity subsidizes the FHA mortgage payments, either |
| An earnings trend also must be established and | | | | through direct payments or through tax rebates, |
| documented for overtime and bonus income. If | | | | these payments can be considered as acceptable |
| either type shows a continual decline, the FHA | | | | income if verified in writing. Either type of subsidy |
| mortgage lender must provide a sound | | | | may be added to gross income or may be used to |
| rationalization in writing for including the income for | | | | directly offset the FAHA mortgage payment before |
| FHA mortgage applicants qualifying. If bonus income | | | | calculating the qualifying ratios. |
| varies significantly from year to year, a period of | | | | Qualifying Rental Income. Rent received for |
| more than two years must be used in calculating the | | | | properties owned by the FHA mortgage applicant is |
| average income. | | | | acceptable if the FHA mortgage lender can |
| Part-Time Income. Part-time/second job income, | | | | document that the rental income is stable. Examples |
| including employment in seasonal work, may be used | | | | of stability may include a current lease, an agreement |
| in qualifying if the FHA mortgage lender documents | | | | to lease, or a rental history over the previous 24 |
| that the FHA mortgage applicant has worked the | | | | months that is free of unexplained gaps greater than |
| part-time job uninterrupted for the past two years | | | | three months. (Student, seasonal, or military |
| and will continue to do so in the future. Seasonal | | | | renters, or property rehabilitation would provide such |
| employment (e.g., umpiring baseball games in summer, | | | | an explanation). A separate schedule of real estate |
| working at a department store during the holiday | | | | is not required for rental properties, provided all |
| shopping season) is considered uninterrupted and | | | | properties are shown on the URLA. |
| may be used in qualifying if the FHA mortgage lender | | | | If the FHA Mortgage applicant resides in one or |
| documents that the FHA Mortgage applicant has | | | | more units of a multiple-unit property and charges |
| worked the same type of job for the past two | | | | rent to tenants of other units, that rent may be |
| years and expects to be rehired during the next | | | | used for qualifying purposes. However, projected |
| season. Income from a part-time position that has | | | | rent of additional units only and not the |
| been received for less than two years may be | | | | owner-occupied unit(s) may be considered gross |
| included as effective income, provided the FHA | | | | income only after deducting the HOC’s vacancy |
| mortgage lender justifies and documents that the | | | | and maintenance factor. They may not be used as |
| income's continuance is likely. Income from part-time | | | | a direct offset to the FHA mortgage payments. |
| positions not meeting these requirements may be | | | | Income from roommates in a single-family property |
| considered as a compensating factor only. | | | | to be occupied as the FHA mortgage applicants |
| For qualification purposes, part-time income refers | | | | primary residence is not acceptable. Rental income |
| to jobs taken to supplement the FHA Mortgage | | | | from boarders is acceptable if the boarders are |
| applicant income from regular employment (i.e., a | | | | related by blood, marriage, or law. The rental |
| second job – not meaning primary jobs of less | | | | income may be considered effective income if shown |
| than 40 hours per week.) If a FHA mortgage | | | | on the borrower's tax returns. Otherwise, the |
| applicants regular employment involves less than a | | | | income only may be considered a compensating |
| typical 40-hour workweek, the stability of that | | | | factor and must be documented adequately by the |
| income should be evaluated as any other regular, | | | | lender. |
| on-going primary employment. For example, a | | | | |