Ever since the new FHA single-family home loan rulebook, HUD 4000.1, was published we have been examining key issues addressed by the new rules. One of those is how the lender is required to examine a borrower’s income for the purposes of verifying it to be included in the debt-to-income ratio.
HUD 4000.1 has sections for hourly income, salary, and part-time income. The section that includes these guidelines states that the lender is responsible for examining earnings from the home loan applicant’s “primary employment” and defines it as follows:
“Primary Employment is the Borrowers principal employment, unless the income falls within a specific category identified below. Primary employment is generally full-time employment and may be either salaried or hourly.”
According to HUD 4000.1, 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.”
That means that projected income is likely not to be used to calculate the debt to income ratio–an “in-the-future” promotion or anticipated promotion may not necessarily help when it comes to the debt to income calculation. However depending on circumstances, it may be wise to speak to the lender about such future developments as a possible compensating factor.
What about for borrowers on hourly incomes?
“For employees who are paid hourly, and whose hours do not vary, the Mortgagee must consider the Borrowers current hourly rate to calculate Effective Income. For employees who are paid hourly and whose hours vary, the Mortgagee 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.”
As you can see, there are different issues for some hourly employees. And then there are the FHA requirements for those earning 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…The Mortgagee may use Employment Income from Part-Time Employment as Effective Income if the Borrower has worked a part-time job uninterrupted for the past two years and the current position is reasonably likely to continue.”
Overtime and bonus income from employment may also be included for employees, provided it meets FHA loan standards: “The Mortgagee may use Overtime and Bonus Income as Effective Income if the Borrower has received this income for the past two years and it is reasonably likely to continue. Periods of Overtime and Bonus Income less than two years may be considered Effective Income if the Mortgagee documents that the Overtime and Bonus Income has been consistently earned over a period of not less than one year and is reasonably likely to continue.”
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