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Proving Your Income for FHA

by K.C. Hernandez

The Federal Housing Administration helps low- to moderate-income borrowers buy and refinance primary residences. Despite credit challenges and minimal down payment funds, an FHA borrower can gain financing from a lender approved to make loans for the government agency. The FHA insures the loan, promising to repay the lender in the event of borrower default. FHA loans require full documentation of borrower income. The lender also verifies that the income comes from an acceptable source.

The Basics

FHA lenders review income to determine the maximum loan amount for which you qualify. The lender compares your gross earnings to your debt load and expresses this relationship as a percentage known as the debt-to-income (DTI) ratio. The target DTI ratio for your new house payment is 31 percent and 43 percent for your combined debts, including housing. You prove your income to the lender with documents such as recent pay stubs, income tax returns, cancelled checks and bank statements if you receive direct deposit.

Employment Income

Self-employed, salaried and wage-earning borrowers may qualify for FHA loans. Self-employed borrowers have a 25 percent or more ownership interest in a business. Lenders require the past two years of individual and business tax returns with all schedules and federal tax returns when income includes commission. They also require IRS Form 1099 and may require three years' of tax returns to establish an income trend. You must prove at least two years of employment in the same job or line of work for the previous two years, regardless of whether you are self-employed. Borrowers with salary or wages provide one month of pay stubs and two years of W-2s.

Non-Employment Income

Borrowers can use alimony, child support or maintenance income if the payments are expected to continue through the first three years of the mortgage. To prove this income, you must provide one of the following: divorce decree, legal separation agreement, a court order or voluntary payment agreement. Additionally, you must prove that you have received the payments for the past year through cancelled checks, deposit slips, tax returns or court records.

Other Income

The FHA accepts income from sources such as investments, trusts, retirement and Social Security. When receiving interest and dividend payments, tax returns prove receipt of payments for the past two years. The FHA considers 75 percent of rental income to account for maintenance and vacancy costs. Pensions, 401K, trust and Social Security income are verified with official agreements or letters, provided by the previous employer, the trustee or the government. The documents must confirm that payments will continue for the first three years of the loan.