Gaps In Employment and Reductions In Income
What does HUD 4000.1 say about temporary reductions of income? When it comes to approving an FHA mortgage or refinance loan, the lender will need to know some things about your situation in order to proceed.
FHA Loan Approval With a Temporary Reduction in Income
HUD 4000.1 says that when reviewing the application of a borrower with a temporary reduction of income “...due to a short-term disability or similar temporary leave, the Mortgagee may consider the Borrower’s current income as Effective Income” IF the lender can document the following are applicable:
- the Borrower intends to return to work;
- the Borrower has the right to return to work;
- the Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstance.
For cases where the borrower will not be returning to work until after the first mortgage payment due date, FHA loan rules state, “the Mortgagee may use the Borrower’s current income plus available surplus liquid asset Reserves, above and beyond any required Reserves, as an income supplement up to the amount of the Borrower’s pre-leave income. The amount of the monthly income supplement is the total amount of surplus Reserves divided by the number of months between the first payment due date and the Borrower’s intended date of return to work.”
FHA Loan Approval and Gaps in Employment
Your FHA lender is required to follow FHA loan rules in HUD 4000.1 for approving loans where the borrower has gaps in the employment record. In the eyes of the FHA, any missed work for longer than six months is considered to be an “extended absence” and in such cases the lender is required to do the following when reviewing the borrower’s current income:
For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrower’s current income as Effective Income if it can verify and document:
- effective dates the Borrower has been employed in the current job for at least six months at the time of case number assignment; and
- a two year work history prior to the absence from employment using standard or alternative employment verification.
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