FHA Addresses Using Social Security Income to Qualify For a Mortgage

August 23, 2012

Documentation requirements have been released for Social Security income used to qualify borrowers for loans insured by the Federal Housing Administration. In addition, the minimum term that the income must continue has been addressed.

Questions from lenders about using Social Security income to qualify borrowers for FHA mortgages prompted the Department of Housing and Urban Development to issue clarification about the requirements in such situations.

Lenders can consider all types of earnings from the Social Security Administration when qualifying a borrower for an FHA loan as long as the income has been verified and is likely to continue for at least three years from the date of the application. According to Mortgagee Letter 12-15, eligible Social Security earnings includes supplemental security income, Social Security disability insurance and Social Security income. Income must be verified from either a federal tax return, the most recent bank statement or a proof of income letter.  In addition, the applicant’s Social Security Benefit Statement SSA-1099/1042S is acceptable.

The term of the income needs to be documented through the last notice of award letter or an equivalent document that establishes award benefits to the borrower. If the start date is in the future, then the borrower needs to have other income until the start date such as worker’s compensation or private insurance to qualify for the loan. When no expiration date is indicated, then the lender can use the Social Security income in the loan qualification without limitation. Social Security income that won’t continue for three years can only be considered as s compensating factor. If re-evaluation is pending of medical eligibility, the lender should not take that as an indication that benefit payments will stop.

“The lender should not request additional documentation from the borrower to demonstrate continuance of Social Security Administration income,” HUD stated. “Under no circumstance may lenders inquire into or request documentation concerning the nature of the disability or the medical condition of the borrower.”

The requirements are immediately effective. Source: Mortgage Daily

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FHA Addresses Use of Rental Income

June 23, 2012

Recent Article Released by FHA:

How is rental income considered for qualifying?

Rent received for properties owned by the borrower is acceptable if the lender can document that the rental income is stable through a a current lease, an agreement to lease, or a rental history over the previous 24 months that is free of unexplained gaps greater than three months. (Student, seasonal, or military renters, or property rehabilitation would provide such an explanation).

A separate schedule of real estate is not required for rental properties, provided all properties are shown on the URLA.

If the borrower resides in one or more units of a multiple-unit property and charges rent to tenants of other units, that rent may be used for qualifying purposes.

However, projected rent of additional units only and not the owner-occupied unit(s) may be considered gross income only after deducting the HOC’s vacancy and maintenance factor.

They may not be used as a direct offset to the mortgage payments.

Income from roommates in a single-family property to be occupied as the borrower’s primary residence is not acceptable.

Rental income from boarders is acceptable if the boarders are related by blood, marriage, or law. The rental income may be considered effective income if shown on the borrower’s tax returns. Otherwise, the income only may be considered a compensating factor and must be documented adequately by the lender.

The following is required to verify all rental income:

1. Schedule E of IRS Form 1040. Depreciation may be added back to the net income or loss shown on Schedule E. Positive rental income is considered gross income for qualifying purposes; negative rental income must be treated as a recurring liability. The lender must be certain that the borrower still owns each property listed, by comparing the Schedule E with the real estate owned section of the residential loan application. (If the borrower in the same general area owns six or more units, a map disclosing the locations must be submitted evidencing compliance with FHA’s seven-unit limitation. )

2. Current Leases. If a property was acquired since the last income tax filing and is not shown on Schedule E, a current signed lease or other rental agreement must be provided. The gross rental amount must be reduced for vacancies and maintenance, before subtracting PITI and any homeowners’ association dues, etc., and applying the remainder to income (or recurring debts, if negative).

Vacancy factors have been developed by HOC jurisdiction:

Santa HOC – 15% vacancy rate

Philadelphia HOC – 15% vacancy rate

Atlanta HOC – 15% vacancy rate

Denver HOC – 25% vacancy rate

Handbook 4155.1: 4.E.4.a-f, 4.D.5.b

REFERENCE

Handbook 4155.1: 4.E.4.a-f

DISCLAIMER

DISCLAIMER: All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.