Borrowers who apply for an FHA home loan are required to list the income they want the lender to consider on the application. This is required for multiple reasons; the lender must calculate the applicant’s debt-to-income ratio and determine whether the borrower appears able to afford the new mortgage payment and other recurring obligations. A borrower who has too much going out and not enough qualifying income may not be approved for an FHA loan.

But there’s another reason for the requirement; an FHA lender must verify and document the employment and income used to qualify the borrower. The lender cannot simply accept on good faith that the information listed on the application is accurate. When a borrower is approved for an FHA-insured mortgage, that approval comes only after the lender has reviewed the documentation and determined that the income meets FHA requirements.

Some borrowers who want FHA loans do not have current employment or are not yet receiving a particular source of income for a variety of reasons. Does this automatically disqualify an FHA loan applicant? Do medical professionals completing residencies, teachers waiting for the new school year to begin, or other borrowers who are scheduled to start a new job get the short shrift simply because the employment has not started yet?

Not necessarily.

FHA rules may allow certain income that has not yet begun to be considered as Expected Income. This can include income from a new job, a cost-of-living adjustment, a performance raise, or retirement income that will begin within 60 days of the mortgage closing.

The lender may consider Expected Income as Effective Income when it meets FHA requirements, except when the expected income will come from a family-owned business. For employment income, the lender must obtain written verification from the employer documenting the existence and amount of the expected income and confirming that it is guaranteed to begin within 60 days of closing. For expected retirement income, the lender must verify the amount and that it is guaranteed to begin within the same 60-day period.

In addition, the lender must verify that the borrower will have sufficient income or liquid assets to meet the mortgage payment and other financial obligations between the loan closing and the date the expected income begins.

The 60-day requirement applies to when the borrower will begin receiving the expected income. It does not mean that every borrower who is temporarily unemployed or waiting for seasonal work automatically qualifies. Seasonal employment, employment gaps, and other situations have separate FHA documentation and income-calculation requirements. The lender must evaluate the borrower’s complete circumstances and determine that all income used for qualifying is properly documented, reasonably likely to continue when required, and calculated according to the applicable FHA standards.

Do you have questions about FHA home loans?  Explore your options for an FHA Purchase, Streamline Refinance, or Cash-Out Refinance Loan. Click Here to Get Started

The post FHA Loans and Income Verification: “Future Income” appeared first on FHA News and Views.