FHA Income Mortgage Guidelines
This article is about FHA Income Mortgage Guidelines
FHA loans are the most popular loan program in the Nation. HUD, the parent of FHA, sets the lending agency guidelines on FHA loans. HUD has lenient mortgage guidelines on FHA loans. More so than any other loan program. FHA mortgage guidelines have strict rules for calculating borrower’s wages. This article explains the different types of income and the income documents needed for an FHA mortgage.
FHA Mortgage Guidelines: Types of Income
When you apply for a mortgage, you must prove that your income is sufficient and stable enough to pay your mortgage as agreed. Note that there is a difference between “income” and “qualifying income.” Qualifying income is the income that your lender determines to be stable and ongoing. Underwriters may adjust your income up or down to come up with your qualifying income.
There are several common types of income you might use to qualify for a home loan:
- Pensions and social security (fixed income)
- Disability income
- Investment income
- Self-employment income
- Wage income
- Bonus and commission income
- Part-time employment income
- Alimony and child support
- Rental income
Each type of income has its own set of rules. A good loan officer or mortgage broker can help you get the right documents together and determine how an underwriter will see it.
Pensions and Social Security Income
There are several ways you can document your Social Security or pension income. You might provide a copy of your award letter or proof of receipt of funds — for example, a copy of your bank statement showing an electronic deposit, or a copy of your check and deposit receipt.
Note that some types of income are not subject to income taxes. In that case, your lender can “gross up” that amount and increase your qualifying income by 25%. So if you receive $1,000 a month in non-taxable benefits, your qualifying income would be $1,250 per month.
Whether you receive a private disability insurance payment or money from Social Security, the VA or your state government, the requirements are largely the same. You’ll provide a copy of the disability award letter and proof of receipt. The reason you need both is that the lender needs to know that you’ll be receiving disability for at least three years to count that income.
If your disability is temporary, you can still use the income if you can show that:
- You intend to return to work,
- You the right to return to work (perhaps providing a letter from your employer),
- And you qualify for the mortgage with your reduced income (disability instead of your full wages).
Investment income includes things like interest, dividends and capital gains on investments. Documenting this income can be tricky because you have to show that it’s stable and ongoing — that you own the investments, that you’ve been receiving it for at least two years and that it will continue for at least three more.
You’ll provide at least two years of tax returns with your supporting schedules and copies of your brokerage statements.
If you have capital gains from selling assets, you won’t be able to count them if they are windfalls. If you routinely buy and sell investments to generate regular income, you may need a letter from your accountant and copies of your financial and brokerage statements.
Self-employed mortgage applicants often overestimate their income. That’s because they count their gross receipts as income when underwriters look at your taxable income after making some adjustments.
The worksheets underwriters use are pretty complicated. Here are some simple rules you can use to ballpark your self-employment income for FHA home loans.
- Start with your taxable income (after all your deductions).
- Add back any depreciation or depletion deductions.
- Subtract any windfall profits that are not part of your regular business income.
- Average that income over two years (if income is increasing) or take the lowest year’s income (if income is decreasing).
You normally need at least two years of self-employment income to qualify. However, you may qualify with 12 months in certain circumstances — for instance, if you worked as an employee and then switched to consulting in the same field.
Salaried wage earners have it easy when it comes to documenting income for a mortgage lender. Expect to provide two years of W-2 forms and a recent pay stub showing your year-to-date income.
If you’re paid by the hour and work 40 hours a week, you’ll provide two most recent pay stubs showing year-to-date income and two years of W-2 forms. Your lender will simply take your hourly wage and multiply it by 40 to get a weekly income.
If you’re paid by the hour and work a variable schedule, the lender averages your wages over the last 24 months. If you can show that you received a wage increase during that time, the lender can average the most recent 12 months.
Once your lender calculates your weekly wage, it converts that to a monthly figure.
For instance, $500/week * 52 weeks = $26,000/year. And $26,000 / 12 months = $2,167 per month.
Overtime and Bonus Income
To count overtime and bonus income, you’ll have to show that you’ve been getting it for at least two years. If your overtime income is stable or increasing, lenders average your overtime income over 24 months. If your overtime or bonus income decreases by 20% or more from one year to the next, however, the lender will use the lower figure — the most recent year’s income.
Your lender may be willing to count bonus or overtime income received for just one year if it’s reasonable to believe that it will continue. The lender could, for instance, send out a Verification of Employment form to your employer asking if your overtime will be ongoing.
FHA guidelines allow your lender to include your commission income if you have “earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue.”
If less than 25% of your employment income comes from commissions, you may just have to supply copies of your W-2s and pay stubs. But expect to provide copies of your tax returns if you earn at least 25% of your income from commissions.
Part-Time or Seasonal Income
You can qualify for a mortgage with part-time or seasonal income. For mortgage underwriting purposes, “part-time” employment refers to jobs that are less than full-time and not your primary income source. If your main job requires fewer than 40 hours a week, it’s still considered regular wage income.
Seasonal income refers to jobs that are performed regularly (full or part-time) but not all year.
Lenders normally want to see 24 months of uninterrupted part-time income before they will add it to your qualifying income. They can choose to include part-time income after one year if you can successfully prove (perhaps with a letter from your employer) that the income will continue.
Seasonal income is considered ongoing for mortgage underwriting purposes as long as you have worked the same job for at least two years and expect to be rehired next season.
If your lender can’t count your part-time or seasonal income, it can at least consider it a compensating factor on your application.
Alimony and Child Support
You can use alimony or child support to qualify for a mortgage as long as you can prove that the payment is required by the court, that you are actually receiving those payments, and that they will continue for at least three years.
To document these things, you’ll need copies of your official court documents specifying who pays what to whom, the amount and frequency of those payments and their duration. You’ll also have to prove that the person responsible for such payments is making them as directed — with copies of the checks and deposit receipts or bank statements showing regular payments into your account.
If your child is turning 18 within three years, you won’t be allowed to use child support payments to qualify for an FHA home loan. If your alimony will terminate in less than three years, you can’t use it to qualify for an FHA mortgage. And if your ex has missed or made partial or late payments in the last six-to-12 months, your lender probably won’t count the child support or alimony as qualifying income.
Alimony is taxable, but child support is not and can be grossed up by 25%.
Rental and Boarder Income
Rental income from property normally appears on your tax return, usually on a Schedule E or F. Mortgage lenders normally count the after-tax income and adjust it upward by adding back any depreciation expense. If the rental is new, the lender takes the gross rent from your lease and reduces it by 25%.\
Income from roommates cannot be counted as qualifying income. However, rental income from boarders is qualifying income if the boarders are related by blood, marriage or law and you declare it on your tax return. Otherwise, the lender can document it and consider it a compensating factor only.
What’s Your Qualifying Income?
Calculating income is a complicated stage of the mortgage process. If you have variable income, our team at Gustan Cho Associates Mortgage Group can help. We will complete a VERIFICATION OF EMPLOYMENT before issuing a pre-approval letter.
We want to make sure we can count every penny of your income possible. Completing the verification of employment upfront is a responsible lending practice. We do as much work upfront as possible to avoid you wasting any money on a home that does not close.
For any questions on income, please call Mike Gracz on 630-659-7644 or send an email to [email protected]. Mike is available seven days a week and can help you complete income calculations. For more difficult loan scenarios, we have a TBD UNDERWRITING PROCESS. This process removes the guesswork and lets you know how much you can borrow.