FHA Updated Income Calculation – Borrowers with a Reduction or Loss of Income Due to COVID-19

FHA Mortgagee Letter 2022-09 announced updates to FHA policy regarding the calculation of income after a reduction or loss of income due to COVID-19.

The update provides new flexibility when calculating the qualifying income for borrowers who can demonstrate their income was adversely affected by COID-19, due to a gap in employment or a decline in income, but now have stable income

FHA defined a COVID-19 related economic event as one of the following that occurred during the COVID-19 National Emergency:

• A temporary loss of employment, or
• Temporary reduction of income, or
• Temporary reduction of hours

The Mortgagee Letter provides exceptions to standard income calculations when the loss was due to COVID -19 related economic event for the following income types:

• Primary employment (salaried)
• Primary employment (hourly wage earner and hours vary),
• Part-time employment (hourly wage earner and hours vary),
• OT, bonus, or tip,
• Commission,
• Borrower employed by family members,
• Self-employment

NOTE:  The Mortgage Letter did not provide for an exceptions to standard income calculations when the loss was due to COVID-19 for seasonal income nor for employer housing subsidy

Income Calculations by Income Type

• Primary Employment: Salaried Wage Earner
  • Salaried employees who were affected by a COVID event and their current income will likely be consistently earned, the current salary is used to calculate income
• Primary Employment Hourly and Hours Vary (Full and Part-Time)
  • The qualifying income is calculated using the lesser of:
    • The average income earned prior to the COVID related event, OR
    • The average income earned since the COVID related event

• Overtime, Bonus & Tip Income
  • The qualifying income is calculated using the lesser of:
    • The average income earned prior to the COVID related event, OR
    • The average income earned since the COVID related event
• Commission Income
  • The qualifying income is calculated using the lesser of:
    • The average earned prior to the COVID related event, OR
    • The average income earned since the COVID related event
• Borrower Employed by Family Member
  • Salaried borrowers who were affected by a COVID event and their current income will likely be consistently earned, the current salary is used to calculate income
  • Borrower paid hourly and hours do not vary use the current hourly rate to calculate qualifying income
  • Borrower paid hourly and hours vary qualifying income is calculated using the lesser of:
    • The average earned prior to the COVID related event, OR
    • The average income earned since the COVID related event
• Gaps in Employment: Non-Self-Employment Income
  • The borrower’s income, when calculated using the applicable exception due to a COVID-19 event, may be considered effective income if it can be verified and documented that:
    • The borrower has been employed in their current job or same line of work for a minimum of one month at the time of case number assignment, OR
    • The borrower has been employed in a different job or line of work for a minimum of 6 months at the time of case number assignment AND has an aggregate 2-year work history prior to case number assignment, excluding gaps in employment, AND
    • A written VOE is required documenting the time period of the temporary loss of employment, hours, or income
• Self-Employed Borrowers
  • The borrower must have an aggregated self-employment history before and after the COVID related event totaling 2-years
    • Self-employment history between 1 and 2 years may be considered when the borrower was previously employed in the same line of work or related occupation as their self-employment for at least 2-years
    • If the borrower’s income level is < 80% of their pre-COVID event income, the file must be downgraded to a manual underwrite
  • Borrowers with a reduction of income due to a COVID-19 related economic event, the borrower must provide the following additional documentation (in addition to standard self-employment income documentation):
    • A letter of explanation, AND
    • The borrower’s business tax returns for the most recent 2-years, AND
    • One of the following:
      • An audited YTD P&L, supporting revenue, expenses, and net income up to and including the most recent month preceding the case assignment date, OR
      • An unaudited YTD P&L, signed by the borrower, supporting revenue, expenses, and net income up to and including the most recent month preceding the case number assignment, AND
      • The 3 most recent business bank statements, that can be no older than the latest 3 months represented on the YTD P&L

NOTE:   The monthly deposits on the business bank statements must support the earnings on the unaudited YTD P&L

• • The gross income is calculated using the lesser of:
    • The average gross income earned over the previous 2-years prior to the COVID-19 economic event, OR
    • The average gross income earned over the previous 6 months after the COVID-19 economic event
      • Self-employed borrowers with a gap in employment or reduction in income/hours due a COVID-19 related economic event, the months where the business was closed, or the income was reduced may be excluded when calculating the effective income.

NOTE:  The borrower must still meet the minimum length of self-employment detailed above.

Important Notes

• The exceptions to income calculations ONLY apply to borrowers who can demonstrate their income was adversely impacted by one of the COVID-19 economic event outlined above; the exceptions DO NOT apply to borrowers whose income was not impacted by a COVID-19 economic event
• Income types not addressed, there is no change to income calculation
• Income used to qualify must be now considered stable and likely to continue
• The income calculations are the same for transactions underwritten by AUS/TOTAL and manually underwritten transactions.

These updates are effective immediately and may be applied to new submissions and loans currently in the pipeline; the updates must be applied to case numbers on or after September 5, 2022.

The FHA guidelines have been updated and posted on the Homebridge website at www.HomebridgeWholesale.com

If you have any questions, please contact your Account Executive.