HUD Qualified Income Mortgage Guidelines For FHA Loans

This ARTICLE Is About HUD Qualified Income Mortgage Guidelines For FHA Loans

HUD Qualified Income Mortgage Guidelines On Qualified Income:

  • It is very rare that two people will have the exact same income, as Americans, are paid in many different ways
  • They are very strict rules on how borrower’s wages are calculated for qualifying mortgage income
  • In this blog, we will detail types of income, specific income requirements, and what income documents are needed for an FHA mortgage

In this ARTICLE, we will discuss and cover HUD Qualified Income Mortgage Guidelines For FHA Loans.

HUD Qualified Income Mortgage Guidelines On Types Of Income

Fixed income:

  • Fixed income means you receive the same amount of being every month from a source such as Social Security, disability, or other retirement accounts (pension accounts)
  • In order to use this income, an underwriter will need to see at least two months of bank statements showing the direct deposits of the fixed income as well as an awards letter
  • An awards letter will detail exactly how much and how often you will receive your fixed income
  • Depending on the income, we may need your tax returns
  • If utilizing social security income, we need to know if you pay federal taxes on your social security income

Assuming you do not, you can gross Social Security wages 115% for qualifying purposes.

Case Scenario On How Mortgage Underwriters Calculate Qualified Income

Example: You receive a social security income of $1800 a month and are NOT required to pay federal income tax on this money.

  • For an FHA loan, we can count $2070 as your monthly income. $1800 *115% = $2070

Salary income:

  • Salary income is one of the easiest to calculate
  • Assuming you have been on your job for at least six months, and underwriter will take your annual salary and divided it by 12 months
  • Many borrowers are paid a salary plus bonus or commission
  • We will dive into those shortly
  • Salary income can be applied right away, so if you get a raise, we can use your new salary as long as you have a pay stub and documentation from your employer to support the raise

Hourly income:

  • Hourly income is where things start to get interesting
  • If you are an hourly employee with variable hours each week and need to have a two-year history of being an hourly employee (either at the same employer or within the same line of work)
  • An underwriter will use a two-year average of hourly income

If you are an hourly employee who works 40 hours per week (or the same hours each week), things get easier.

If you always work the same number of hours, and the underwriter can justify those hours on the verification of employment, then they will calculate your income accordingly:

Example:

  • $18 per hour, 40 hour per week – $18*40hrs = $720 per week, $720 / week * 52 weeks = $37,440 a year or $3120 a month

Overtime income:

  • Overtime income is another grey area for income calculations
  • In order to count your overtime income, you MUST have a two-year history of receiving overtime income and the overtime hours must be likely to continue
  • If an underwriter can verify a two-year history and the likelihood of continuance, they will calculate your overtime income off a two-year average
  • If your income is decreasing from the first year to the second year, they will give you a 12-month average of the most recent year
  • If your overtime hours are increasing from year one to year two, they will calculate based on a 24-month average

When utilizing overtime income, the verification of employment must clearly breakdown what portion of your income is considered overtime and must clearly state the overtime hours are likely to continue.

HUD Qualified Income Guidelines On Commission Income Wage Earners

Commission income:

  • Many of our clients are commission-based employees
  • This can be difficult to calculate depending on your commission cycle
  • Once again you will need a 24-month average of receiving commission income to use it as qualifying income
  • There are cases where an underwriter can approve commission income was slightly less than 24 months
  • However, the general rule is you must receive a commission for the previous 24 months
  • Just like overtime income, if it is decreasing from year one to year two, they will use a 12-month average
  • If your commission income is increasing from year one to year two, they will then use a 24-month average
  • This can be difficult for clients who have changed jobs with different pace structures
  • For example, if you were paid a salary plus commission at your previous employer, and now you are a 100% commission employee, you will be at a disadvantage

The underwriter cannot count your old salary as qualifying income and will give you 24 average commission earnings.

Using Bonus Income To Qualify For A Mortgage

When we use the additional income, we qualify for a mortgage

Bonus income:

  • Just like overtime and commission income, in order to count bonuses from your employer as qualifying income, you must have a two-year history of receiving a bonus
  • This will be part of the verification of employment completed during the loan process
  • Some clients receive a quarterly bonus, some receive a yearly bonus, every employer is different

The underwriter must verify you have received two years of bonuses as well as the likelihood the bonus will continue.

Qualifying For A Mortgage Using Part-Time Income

Part-time income:

  • Part-time income can be tricky to verify
  • In order to count part-time income, you must have a 24-month consecutive history of working part-time
  • Just like hourly income, the underwriter will use a 24-month average to calculate part-time income

If there is a gap in the previous 24 months, that usually will be a problem counting part-time income.

HUD Qualified Income Guidelines On Having Multiple Jobs

Working more than one job:

  • We have numerous clients who work more than one job
  • We can count your income from both positions as long as you have a two-year history of working more than one job
  • Anything less than a clear 24-month history of working both jobs will not allow us to utilize income from both positions
  • An underwriter must document a two-year history of your ability to work more than one job AND the likelihood of both positions containing

If there is not a clear-cut to your history, then only one of your jobs will be counted as qualifying income.

Using Alimony, Child Support, Maintenance Income To Qualify For A Mortgage

Alimony, child support, and maintenance income:

  • If you’re using alimony, child support, or maintenance income, the lender must obtain a fully executed divorce decree, legal separation agreement, or court order
  • The lender must also document the income being received for the previous 12 months with canceled checks, deposit slips, or tax returns
  • If the income is not consistent, the underwriter May utilize an average based on the most recent six months

This income must also be documented to continue for at least 3 years.

Investment Income

Will I get a return on my investment?

Investment income:

  • Investment income baby utilized for qualifying purposes
  • Usually, this refers to dividend income received from assets such as stocks, bonds, money market accounts, and mutual funds
  • The lender must document interior history based on individual tax returns

The lender will utilize the lesser of a 24-month average or the most recent 12-month average (when income is decreasing).

HUD Qualified Income Guidelines On Self-Employment Income

Self-employed income:

  • Self-employed income creates the most confusion for mortgage qualifications
  • If you are self-employed, there are specific income calculators used to determine your income
  • Depending on how you file your taxes, these calculators can work for or against you

The majority of self-employed borrowers do utilize write-offs to pay less income tax, but when applying for a loan, this can shoot you in the foot.

Calculating Self-Employed Income 

When calculating self-employed income, the lender must use a two-year average based on their federal income taxes (based on the two most recent years filed):

  • If their income is increasing from year one to year two, a 24-month average is used
  • If your income is decreasing from year one to year two, a 12-month average will be used off the most recent year
  • Depending on when you close, you will need a signed profit and loss schedule to justify your income has stayed the same for each quarter that has elapsed since your last filed tax return
  • If your yearly profit and loss schedule does not justify the income based on your tax returns, this can be detrimental to your qualifications

If you are self-employed and struggling to qualify for a mortgage, you may want to look into our BANK STATEMENT MORTGAGE PRODUCTS.

Variable Income Used For Qualified 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 up front as possible to avoid you wasting any money on a home that does not close
  • You will need to pay for inspections and appraisals upfront in the mortgage process

Before you put any money down, we want you to feel 100% confident your mortgage will close.

For any questions on income, please call Mike Gracz on 630-659-7644 or send an email to mgracz@gustancho.com. 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 will underwrite your credit and income profile, taking the guessing out of the process.  working with an inexperienced loan officer who is not familiar with income guidelines can be a nightmare. You may be qualified using income that is not allowed, which can lead to a mortgage denial. Call the experts from the Gustan Cho Associates today.

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