Every loan has requirements in terms of income. For FHA loans, it is not about the amount of income that you make, but more so about the debt-to-income ratio that you will have if you were to obtain the new loan. In addition, there is great focus on the reliability of your income and the likelihood that it will continue for the foreseeable future. All of these factors play a role in determining the risk level of providing you with a new FHA loan.

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Looking Ahead 3 Years

 

In general, the FHA looks for income to be continuing for the next three years. For salary or wages, these calculations are easy to determine when an employment of verification checks out as valid. In other cases, such as retirement income, overtime income, bonuses or federal assistance, more verification will be required in order to determine if it should be used to qualify you for the loan. The factors that play a role in the process increase dramatically if your situation is predicted to change within the next three years, such as if you are planning on retiring within the next three years.

 

Commission Income and its Role in FHA Loans

 

Commission income is one of the tricky types of income that lenders must handle. Not all commission income is admissible for approval on an FHA loan. The most important factor is the stability of the income. If it is rather new to you, it will likely not be able to be used. On the other hand, if you have received commission income steadily for the last two years, it is likely that it will be used to calculate your debt-to-income ratio. In this case, an average of the last two years income, from your tax returns is used to calculate your income amount. In addition, you will need to provide proof of current receipt of the commission, which is usually possible with your most recent pay stub. If your commission has steadily decreased, you will need to provide other compensating factors to get approved for the loan, such as excessive assets, but the end result is up to the individual underwriter and their feeling on the situation.

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Retirement Income and FHA Loans

 

There are several types of retirement income to account for when determining the debt-to-income ratio for your loan. Income that comes from a previous employer will need to be verified for its current receipt as well as its duration. If a 401(k) or pension income will not solidly continue for the next three years, it will not be admissible as verifiable income for an FHA loan. The same rules apply to social security income. This income will need to be verified by your tax returns and/or by a letter from the Social Security Administration. If this income cannot be proven to be provided for the next three years, then it will not be able to be used for loan qualification purposes.

 

Verifying any Income

 

All income must be verifiable by the underwriter. In general, this means that you and/or your employer or income provider can supply proof that the income is being received now and will continue for the next three years. If your income comes directly from an employer, a verification of employment can be done over the phone or by receipt of a letter directly from the employer verifying your employment as well as your income. If your income is not steady, such as commission or retirement income, verification of receipt is done through your tax returns as well as through award letters that you receive when you first begin receiving the income. Verification for any of these types of income can also be done over the phone if necessary.

 

In general, all income needs to be verifiable and proven that it will continue for at least 3 years. Any income that will not continue for three years but is being received now is considered a “compensating factor.” This means that it can work in your favor, should you be on the fringe of being approved or denied. Underwriters use compensating factors in the overall picture of your risk level when trying to determine whether to approve or deny an FHA loan.

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