FHA Income Qualifications & Requirements
To be eligible for an FHA insured mortgage, FHA does not require a minimum length of time that a borrower must have held a position of employment. However, the borrower’s employment for the recent two (2) full years must be verified.
The borrower’s ability to repay the loan is a big factor that’s considered when qualifying for a loan. Effective income is calculated which includes, base salary, overtime, and bonus. Overtime and bonus income can be used to qualify a borrower if they have been receiving this income for the past two (2) years and if it will likely continue. If employment verification shows that the borrower has not been receiving overtime pay and bonus in the last two years, it may not be used in qualifying. Moreover, if employment verification states that overtime and/or bonus income is unlikely to continue, it may not be used in qualifying also.
FHA Income Guidelines
The lender must establish and document an earnings trend for overtime and bonus income. If either type of income shows a continual decline, the lender must document in writing a sound rationalization for including the income when qualifying the borrower.
A period of at least two years must be used in calculating the average overtime and bonus, if not longer. Overtime and bonus must not vary significantly from one year to another.
There is the stability of income rule that FHA insured mortgage requires. If the borrower does not have a full two (2) years verifiable employment history, the borrower must:
• Be employed in the current job for six months or longer; and
• Explain any gaps in employment that span 30 days or more;
• Must qualify using base income only.
Part-Time and Seasonal Income
Part-time and seasonal income can be used to qualify if the borrower can demonstrate and document uninterrupted employment for the last two years and plans to continue working accordingly.
Part-time income not meeting the qualifying requirements may be considered as a compensating factor only but not to actually qualify for the loan.
Seasonal income may be considered if it is uninterrupted and may be used to qualify for the loan if the borrower:
• Has worked the same job for the past two years, and
• Expects to be rehired the next season.
Commission income must be averaged over the previous two years. In order to qualify for an FHA insured loan, the borrower must:
• Provide signed copies of the last 2 years tax returns, and
• Provide a most recent 30-day paycheck stub.
Commission income that is not stable and decreases from one year to the next will require a significant compensating factor before a borrower can be approved for the loan. If an employee receives 30% or more of his effective income as a commission, the two-year rule will apply.
Commission income received for less than one year is not considered effective income. The exception to this rule may be made if the borrower’s compensation was changed from salary to commission within a similar position with the same employer. Also, a borrower may qualify when the portion of his earnings not attributed to a commission is enough to qualify for the mortgage.
Social Security Income, Employer Pensions or 401(k) Distributions are considered Retirement Income. It must be documented and verified by the employer or from Federal tax returns. If any retirement income will cease within the first three (3) full years of the mortgage loan, the income cannot be used and may only be used as a compensating factor.
The borrower’s Social Security Income can be grossed up if deemed non-taxable by the IRS. The borrower must provide a complete award letter to document Social Security income.
Self- Employment Income
Under FHA Underwriting guideline, a borrower is defined as “Self-Employed” if he has 25% or greater ownership interest in a business. The four basic types of business structures are:
• Sole Proprietorship,
• Limited Liability or “S” Corporations, and
Income from self-employment is considered stable and effective if the borrower has been self-employed for at least 2 full years. The borrower must provide:
• Signed, dated individual tax returns with all applicable schedules for the most recent two full years;
• For S Corporations or partnerships, signed copies of Federal business income tax returns for the last two years, with all applicable schedules;
• A year-to-date Profit and Loss (P&L) Statement and balance sheet, and
• Business credit report for corporations and S Corporations.
Our FHA Loan Specialists are on hand to assist you should you need additional information regard income requirements for FHA loans. Contact our FHA Loan Specialist now.
Reference: HUD 4155.1