Gaps In Employment and Reductions In Income

April 5, 2018

FHA loan rules in HUD 4000.1 address situations where a loan applicant may have a short employment history, frequent changes in employers, and gaps in employment. FHA loan rules also instruct the lender how to proceed when a borrower has a temporary reduction in income due to issues such as disability, medical leave, etc.

What does HUD 4000.1 say about temporary reductions of income? When it comes to approving an FHA mortgage or refinance loan, the lender will need to know some things about your situation in order to proceed.

FHA Loan Approval With a Temporary Reduction in Income

HUD 4000.1 says that when reviewing the application of a borrower with a temporary reduction of income “...due to a short-term disability or similar temporary leave, the Mortgagee may consider the Borrower’s current income as Effective Income” IF the lender can document the following are applicable:

• the Borrower intends to return to work;
• the Borrower has the right to return to work;
• the Borrower qualifies for the Mortgage taking into account any reduction of income due to the circumstance.

If the borrower has come back to work on or before the date of the first mortgage payment due date, the lender is permitted to process the loan using the applicant’s “pre-leave income”.

For cases where the borrower will not be returning to work until after the first mortgage payment due date, FHA loan rules state, “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. 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.”

FHA Loan Approval  and Gaps in Employment

Your FHA lender is required to follow FHA loan rules in HUD 4000.1 for approving loans where the borrower has gaps in the employment record. In the eyes of the FHA, any missed work for longer than six months is considered to be an “extended absence” and in such cases the lender is required to do the following when reviewing the borrower’s current income:

For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrower’s current income as Effective Income if it can verify and document:

• effective dates the Borrower has been employed in the current job for at least six months at the time of case number assignment; and
• a two year work history prior to the absence from employment using standard or alternative employment verification.

Additional regulations, lender standards, and state law may apply above and beyond what is written here. Speak to a loan officer to learn how these rules may affect your FHA home loan transaction.

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