FHA Loans and Trust Fund Income
January 3, 2014
When you apply for a new purchase FHA home loan, FHA loan rules say you must list your income and employment details. This lets your loan officer accurately determine your debt-to-income ratio, using calculations based on your “verifiable income”.
When it comes to verifiable income, FHA loan rules only permit income the lender determines is likely to continue--a borrower’s wages, tips, bonuses and other earnings may be counted if they meet FHA criteria for “stable and reliable” and the previously mentioned “likely to continue” status.
Since a particular source of income for some borrowers involves a trust fund, it raises an important question. Can trust income be used as verifiable income for an FHA mortgage loan? Does it qualify?
Yes, trust fund income can qualify--if that trust income meets FHA loan minimum standards as described in HUD 4155.1. These rules include following guidance to lenders when reviewing trust fund income listed on a borrower’s application--rules listed under the section called Investment and Trust Income:
“Interest and dividend income may be used for qualifying as long as tax returns or account statements support a two-year receipt history. This income must be averaged over two years.”
The rules also require the lender to do some math on this income, as follows. “The underwriter should subtract any funds derived from these sources that are required for the cash investment, before calculating the projected interest or dividend income. Income from trusts may be used for qualifying if guaranteed, constant payments will continue for at least the first three years of the mortgage term.”
FHA loan rules also require the FHA loan applicant to provide documentation of the trust arrangement. According to HUD 4155.1:
“Required trust income documentation includes a copy of the Trust Agreement or other trustee statement, confirming the
• amount of the trust
• frequency of distribution, and
• duration of payments.”
These rules permit the borrower use trust accounts funds for the required FHA loan down payment, but only “if he/she provides adequate documentation that this withdrawal will not negatively affect the amount of trust income the underwriter used to determine repayment ability.”
For more information on these standards, speak to your loan officer or contact the FHA directly.
When it comes to verifiable income, FHA loan rules only permit income the lender determines is likely to continue--a borrower’s wages, tips, bonuses and other earnings may be counted if they meet FHA criteria for “stable and reliable” and the previously mentioned “likely to continue” status.
Since a particular source of income for some borrowers involves a trust fund, it raises an important question. Can trust income be used as verifiable income for an FHA mortgage loan? Does it qualify?
Yes, trust fund income can qualify--if that trust income meets FHA loan minimum standards as described in HUD 4155.1. These rules include following guidance to lenders when reviewing trust fund income listed on a borrower’s application--rules listed under the section called Investment and Trust Income:
“Interest and dividend income may be used for qualifying as long as tax returns or account statements support a two-year receipt history. This income must be averaged over two years.”
The rules also require the lender to do some math on this income, as follows. “The underwriter should subtract any funds derived from these sources that are required for the cash investment, before calculating the projected interest or dividend income. Income from trusts may be used for qualifying if guaranteed, constant payments will continue for at least the first three years of the mortgage term.”
FHA loan rules also require the FHA loan applicant to provide documentation of the trust arrangement. According to HUD 4155.1:
“Required trust income documentation includes a copy of the Trust Agreement or other trustee statement, confirming the
• amount of the trust
• frequency of distribution, and
• duration of payments.”
These rules permit the borrower use trust accounts funds for the required FHA loan down payment, but only “if he/she provides adequate documentation that this withdrawal will not negatively affect the amount of trust income the underwriter used to determine repayment ability.”
For more information on these standards, speak to your loan officer or contact the FHA directly.
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