FHA Loan Income Rules to Consider Before Applying

What do you need to know about FHA home loan rules for income? Your lender is required to make sure you can realistically afford your mortgage, and that means verifying that your income is stable, reliable, and will continue after your mortgage has closed. What some don’t realize (at first) about this process is that there are standards for verifying income.

Not all income counts, and some income must be earned for a minimum amount of time before it will be counted toward your gross income for the purpose of qualifying you for a loan.
 
There are rules for your main job or primary employment, there are rules for the lender when it comes to any projected income you feel you are likely to earn, and there are rules for counting part-time income. What do you need to know about these rules before you fill out a loan application?

FHA Loan Rules for Income

HUD 4000.1, the FHA Single-Family Lender’s Handbook, has instructions for the lender to review hourly income, salary, and part-time income. Your participating FHA lender is responsible for examining earnings from the home loan applicant’s “primary employment” which is defined in the rule book as being “the Borrower's principal employment” unless some or all of that income falls within a specific category such as part-time work, overtime, bonuses, etc.

FHA loan applicants who earn a salary will have their current pay evaluated. “For employees who are salaried and whose income has been and will likely be consistently earned, the Mortgagee must use the current salary to calculate Effective Income.”

Some borrowers want to know if a projected pay raise might be included in the income calculation. For FHA purchase loans, such projected income is likely not to be used. What you are actually earning will be the important figure at application time.

Hourly Pay Rules

And what about those who may have hourly pay instead of a salary? HUD 4000.1 has a section addressing income requirements for borrowers with hourly employment.  “For employees who are paid hourly, and whose hours do not vary, the Mortgagee must consider the Borrower's current hourly rate to calculate Effective Income.”

The rulebook adds that for employees who are paid hourly and whose hours vary, the lender must average the income “over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use the most recent 12-month average of hours at the current pay rate.”

Part-Time Income

And what does HUD 4000.1 say about part time income? “Part-Time Employment refers to employment that is not the Borrowers primary employment and is generally performed for less than 40 hours per week” and FHA loan rules allow your lender to use part-time income to qualify for a home loan. 

This is true when, “the Borrower has worked a part-time job uninterrupted for the past two years and the current position is reasonably likely to continue.” And FHA loan rules for overtime and bonuses fall into a similar requirement; such income must have been earned for at least two years before it can be considered stable and reliable income.

If you aren’t sure how these rules may affect your ability to get a home loan approved, talk to a loan officer. It pays to know what your lender expects to see from a home loan application.

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