Important Changes to FHA Loan Rules for Income Verification

September 11, 2012

There are new rules from the FHA that affect how borrowers drawing Social Security benefits can qualify for FHA mortgage loans. In August of 2012, the Federal Housing Administration revised its guidance to lenders regarding the verification of Social Security Income to qualify for FHA mortgages.

FHA/HUD Mortgagee Letter 12-15, titled "Documentation Requirements for Income from the Social Security Administration" explains a set of new rules for documenting and verifying SSI as income for the purposes of getting an FHA insured mortgage loan. These rules replace a set of older requirements; the new guidance includes the following:

"All income from the Social Security Administration (SSA) including, but not limited to, Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), and Social Security Income, can be used to qualify the borrower if the income has been verified, and is likely to continue for at least a three year period from the date of mortgage application."

Borrowers who draw SSI or SSDI must supply documentation to the lender to show they are indeed drawing the pay, that it has been documented, and is considered "likely to continue" according to the following quote from Mortgagee Letter 12-15:

"The lender must verify income by obtaining from the borrower any one of the following documents:

-- Federal tax returns;

-- the most recent bank statement evidencing receipt of income from the SSA;

-- a Proof of Income Letter, also known as a "Budget Letter" or "Benefits Letter" that evidences income from the SSA (Please visit www.ssa.gov for an explanation of types of letters issued by the SSA);

or

-- a copy of the borrower's Social Security Benefit Statement, SSA-1099/1042S."

The lender must determine how long the borrower is to receive such benefits from Social Security.

According to the new rules, "In addition to verification of income, the lender must document the continuance of this income by obtaining from the borrower (1) a copy of the last Notice of Award letter which states the SSA's determination on the borrower's eligibility for SSA income, or (2) equivalent document that establishes award benefits to the borrower (equivalent document)."

What happens if the SSI is not to continue beyond three years from the date of the FHA home loan application? According to the FHA and HUD:

"If any income from the SSA is due to expire within three years from the date of mortgage application, that income may only be considered as a compensating factor."