Policy and Procedure: FHA Temporary Reduction of Income

 

The income of all borrowers who will be obligated for the mortgage debt must be analyzed to determine if their income level can be reasonably expected to continue through at least the first three years of the loan. The following policy is to provide clarity for FHA requirements regarding temporary reduction of income and what is required if the borrower will return to work prior to or after the first payment date.

 

For Borrowers with a temporary reduction of income due to a short-term disability or similar temporary leave, including but not limited to applicants who are pregnant, are, will be or have been on maternity, adoptive, or paternity leave, the Mortgagee may consider the Borrower’s current income as Effective Income, if it can verify and document that:

• the Borrower intends to return to work.

• the Borrower has the right to return to work; and

• the Borrower qualifies for the Mortgage considering any reduction of

  income due to the circumstance.

 

For federal, state, tribal, or local government employees temporarily out of work due to a government shutdown or other similar, temporary events (where lost income is anticipated to be recovered), income preceding the shutdown can be considered as Effective Income. 

 

Borrowers returning to work BEFORE or at the time of the first Mortgage Payment due date, the Mortgagee may use the Borrower’s pre-leave income as Effective Income.

 

For Borrowers returning to work AFTER the first Mortgage Payment due date, the Mortgagee may use the Borrower’s current income plus available surplus liquid asset Reserves, above and beyond any required Reserves, as an income supplement up to the amount of the Borrower’s pre-leave income as Effective Income.

 

The amount of the monthly income supplement is the total amount of surplus Reserves divided by the number of months between the first payment due date and the Borrower’s intended date of return to work.

 

The Mortgagee must provide the following documentation for Borrowers on temporary leave:

• a written statement from the Borrower confirming the Borrower’s intent to return to work, and the intended date of return.

• documentation generated by current employer confirming the Borrower’s eligibility to return to current employer after temporary leave; and

• documentation of sufficient liquid assets, in accordance with Sources of Funds, used to supplement the Borrower’s income through intended date of return to work with current employer.

 

Published for MDE Home Loans 1/2025 - HUD 4000.1, FHA Single Family Housing Policy Handbook: Section II. ORIGINATION THROUGH POST CLOSING (4) Underwriting the Borrower Using the TOTAL Mortgage Scorecard; (C) Income Requirements (TOTAL)