FHA Income Qualifying Guidelines

HUD requires a borrower to have sufficient and adequate income to cover the repayment of the mortgage.  Before a borrower can be approved for a FHA home loan, the stability of income and the continuance of the borrower's income must be established through acceptable sources of income, the borrower's past employment record, and the employer's confirmation of continued employment must be established. 

Stability of a person's income is generally derived from their employment history.  HUD requires verification for the previous two full years and must be documented through lender verifications of previous employment or W-2's.  This income must be analyzed to determine whether it can be expected to continue through the first 3 years of the mortgage loan (if the borrower intends to retire during this period, the expected retirement income, social security benefits, etc. should be used).  Any gaps in employment must be reasonably explained by the borrower.  Schooling or education for  the borrower's profession (e.g. nursing school) can be counted towards the 2 year requirement.  Allowances for seasonal employment, such as is typical in the building trades for example, may be used.  

The following is a break down of the different types of income HUD considers acceptable:
  

• Salary / W-2 Income

• Overtime or Bonus Income:  Both may be used to qualify the borrower as long as the income has been received for the past two years and is likely to continue.  An average of the bonus or overtime income over the last 2 years is used

• Part-time Income:  Part-time income (second job) may be used in qualifying if the borrower has a 2 year employment history without interruption.  Seasonal employment may be used if the borrower can demonstrate a 2 year history and the probability of continuation.  Income from part-time positions that does not meet these requirements should be considered as a compensating factor only

• Commission Income:  Commission income must be averaged over the previous 2 years.  The borrower must provide his/her last 2 years Federal tax returns (1040's) with all schedules.  Any un-reimbursed business expenses must be subtracted from the gross income.  

• Retirement / Social Security Income:  Verification from the source is required.  If the income should expire within 3 years, the income cannot be used to qualify the borrower and used only as a compensating factor

• Alimony, Child Support, or Separate Maintenance:  Though not required for qualification, a borrower who chooses to use this income must 1) provide a 12 month payment history from the ex-spouse or courts showing timely payment and 2) provide evidence that such payment will continue for at least 3 years.  A copy of the divorce decree, settlement agreement, etc. will be necessary.

• Notes Receivable:  A copy of the note and evidence that payments have been received for a minimum of 12 months are required.  Should the note expire within 3 years, it can be used as a compensating factor only.

• Interest and Dividends:  Interest and dividend income may be used provided documentation (such as tax returns or account statements) supports a 2 year history of receipt.  This does not include dividend re-investment plans.

• Rental Income:  Rent received from investment properties owned by the borrower may be used, subject to the proper documentation.  Income from roommates, etc., in a single-family property to be occupied as the borrower's primary residence is not acceptable.  Rental income is calculated from the borrower's Schedule E of their 1040's.  Depreciation can be added back to the borrower's net rental income.  Positive rental income is considered as gross income for qualifying purposes;  negative rental income must be treated as a recurring liability.  Copies of the leases must support a continuation of the income.

• Self-Employed:  A borrower with 25% or more ownership interest in a business is considered self-employed.  The income from borrower's self-employed less than one year is not acceptable.  Borrower must supply the following:  1) personal tax returns for the most recent 2 years (with all schedules), 2) K-1's, 1120's or 1120S's for the last 2 years, financial statements (profit and loss statement and a balance sheet) for the interim and last 2 years, 3) borrower will have to sign an 8821 or 4506 income taxes release form (see lender).