Not every home loan applicant has the same type of employment, compensation, or schedule of compensation. That’s why FHA home loan rules include different instructions to the lender for a diverse range of income sources.

FHA Loan Rules For “Primary Income”

FHA loan rules have 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 Borrower’s 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.”

“Current Pay” Versus “Projected Pay”

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

That means an anticipated promotion or raise that has not yet taken effect generally cannot be treated as the borrower’s current salary when the lender calculates qualifying income and the debt-to-income ratio. FHA does have separate requirements for certain documented income that is expected to begin after closing, but a possible future promotion by itself is not a compensating factor and does not automatically increase qualifying income. Borrowers should discuss any documented employment or pay change with the lender so the lender can determine whether it may be considered under the applicable FHA requirements.

FHA Loan Rules For Hourly Employees, Part-Time Employment

FHA loan rules address 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. 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. The lender must also determine that the income is stable and reasonably likely to continue. Variable hours generally require an income history and averaging rather than simply multiplying the latest hourly rate by a full-time schedule.

And then there are the FHA requirements for those earning part-time income:

“Part-Time Employment refers to employment that is not the Borrower’s 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.”

For qualifying purposes, the lender generally averages part-time income over the previous two years. If the lender can document an increase in the pay rate, FHA permits the lender to use a 12-month average of hours at the current pay rate.

FHA Loan Rules For Overtime, Bonus, Or Tip Income

Overtime, bonus, or tip income from employment may also be included, provided it meets FHA loan standards.

“The Mortgagee may use Overtime, Bonus or Tip 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, Bonus or Tip Income less than two years may be considered Effective Income if the Mortgagee documents that the Overtime, Bonus or Tip Income has been consistently earned over a period of not less than one year and is reasonably likely to continue.”

The lender must calculate this income using the lesser of the average earned over the previous two years–or the actual period received if it has been earned for less than two years–and the average earned over the previous year. This requirement is designed to prevent the lender from relying on a higher long-term average when more recent overtime, bonus, or tip income is lower. These FHA rules establish minimum underwriting requirements. Individual lenders may have additional requirements, and all employment income must be properly verified, supported by the borrower’s documentation, and reasonably likely to continue.

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