HUD Offers New Flexibility to Calculate Effective Income for FHA Loan Applicants Affected by COVID-19 Economic Event

In Letter to mortgagee 2022-09 dated July 7, 2022, the U.S. Department of Housing and Urban Development (HUD) is establishing new flexibility in underwriting guidelines for calculating effective income for Federal Housing Administration (FHA)-insured loan applicants who have undergone a reduction or loss of income due to a COVID-19 economic event. The guidelines in the letter from the mortgagee apply to Title II Single Family Term Mortgages with case numbers assigned on or after September 5, 2022, although lenders may begin using the policies announced in the letter from the mortgagee immediately. HUD will accept comments on the letter from the mortgagee for 30 days from the date of the letter.

The Letter to the Mortgagee discusses both loan underwriting with the Technology Open To Approved Lenders (TOTAL) Mortgage Scorecard and manual underwriting. For the purposes of both types of underwriting, a COVID-19 economic event refers to a temporary loss of employment, temporary reduction in earnings, or temporary reduction in hours worked during the declared COVID-19 national emergency. by the president. Guidance is provided on the following aspects of the FHA underwriting guidelines:

• Main job

• Part-time work

• Income from overtime, bonuses or tips

• Employed by a family business

• Commission income

• Income from self-employment

• Additional analysis required of stability of employment income

We cover some parts of the guidelines below.

Main job

Effective Income Calculation—TOTAL and Manual

Salary—Standard. For employees who are salaried and whose income has been and is likely to be earned steadily, the lender should use the running salary to calculate effective income.

Salary—Exception due to economic event related to COVID-19. For employees who are employees and whose running income will likely be earned steadily, the lender must use the running salary to calculate effective income.

Schedule—Standard. For hourly paid employees whose hours does not varythe lender must consider the borrower running hourly rate to calculate effective income.

For hourly paid employees whose hours varythe lender must use the medium income on the two previous years. If the lender can document a pay rate increase the lender can use the average of the last 12 months hours at running pay rate.

Schedule—Exception due to an economic event related to COVID-19. For hourly paid employees whose hours does not varythe lender must use the running hourly rate to calculate effective income.

For hourly paid employees whose hours varythe lender must calculate the actual income using the lesser of:

• The medium income in accordance with standard guidelines for the period prior to the economic event related to COVID-19; Where

• The medium income earned since the economic event related to COVID-19.

Part-time work

Effective Income Calculation—TOTAL and Manual

Standard. The lender must medium the income on the two previous years. If the lender can document an increase in the rate of return, they can use a average over 12 months hours at running pay rate.

Exception due to an economic event related to COVID-19. For paid employees every hour and whose hours does not varythe lender must use the running hourly rate to calculate effective income.

For paid employees every hour and whose hours varythe lender must calculate the actual income using the lesser of:

• The medium income in accordance with standard guidelines for the period prior to the economic event related to COVID-19; Where

• The medium income earned since the economic event related to COVID-19.

Overtime, bonuses or tips

Effective Income Calculation—TOTAL and Manual

Standard. For employees with overtime, bonuses or tips, the lender should calculate the actual income using the lesser of:

• The medium Overtime, bonuses or tips earned during the two previous years or if less than two yearsthe a length of time Overtime, bonuses or tips have been earned; Where

• The medium Overtime, bonuses or tips earned during the last year.

Exception due to an economic event related to COVID-19. For employees with overtime, bonuses or tips, the lender should calculate the actual income using the lesser of:

• The medium income in accordance with standard guidelines for the period prior to the economic event related to COVID-19; Where

• The medium Overtime, bonuses or tips earned since the economic event related to COVID-19.

Commission income

Effective Income Calculation—TOTAL and Manual

Standard. The lender must calculate the effective income for the commission using the lesser of:

• Let (i) the medium Commission income earned during the two previous years for commission income earned for two years or moreor (ii) the a length of time Commission income has been earned if less than two* years; Where

• The average commission income earned during the last year.

*In the TOTAL guide, the reference to “two” does not appear, apparently by mistake.

Exception due to an economic event related to COVID-19. For employees with commission income, the lender should calculate the actual income using the lesser of:

• The medium income in accordance with standard guidelines for the period prior to the economic event related to COVID-19; Where

• The medium commission income earned* since the economic event related to COVID-19.

*In the instructions of the manual, the reference to “won” does not appear, apparently by mistake.

Self-employment income

In addition to the guidance provided below, the Letter to the Mortgagee discusses standard guidance and advice regarding exceptions due to an economic event related to COVID-19, for the ability to consider self-employment income , required documentation and additional analysis required of employment income stability.

Effective Income Calculation—TOTAL and Manual

Standard. The lender must analyze the borrower’s tax returns to determine gross self-employment income. (Requirements for analyzing self-employment documentation can be found in Analyzing IRS Forms (Appendix 2.0) of HUD Handbook 4000.1.)

The lender must calculate gross self-employment income using the lesser of:

• The medium gross self-employment income earned during the two previous years; Where

• The medium gross self-employment income earned during the the previous year.

Exception due to an economic event related to COVID-19. For self-employed borrowers with an economic event related to COVID-19 who have since returned to income at a level greater than or equal to 80% of their income prior to Economic event related to COVID-19 for a minimum of six monthsthe lender must calculate gross self-employment income using the lesser of:

• The medium gross self-employment income earned during the two previous years prior to the economic event related to COVID-19; Where

• The medium gross self-employment income earned during the previous six months after the economic event related to COVID-19.

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