FHA now has new rules for home buyers that have been affected by COVID. So if you've had either an income loss or a job gap, because of COVID, these new rules are going to help you before this, a lot of the guidelines for how people got approved were really up to the lender because FHA wasn't actually clear about how to treat income or job losses or gaps. With COVID. So lenders have been a bit in the dark.
So this got sent out here on July 7th, 2022. This year's subject is Calculating Effective Income after a Reduction or Loss of Income for Borrowers Affected by Presidential Declared. COVID 19 National Emergency. What has so the effective date of this is every FHA case number. Assigned after September 5th, 2022, but it says that mortgages, which are the lenders in this case can begin using this immediately. So I wanted to highlight a couple of things here to be aware of the link for this is gonna be in the description if you wanna read through it.
Because there's a lot of language in here, and a lot of different scenarios, I wanna cover a couple of highlights. So first of all, they're just talking about what is COVID. I think we're all familiar with COVID and what's happened and how it's impacted the economy here.
First of all, with salary it's gonna be very standard basically says for people who are salaried, whose current income will likely be consistently earned, the lender can use the current salary to calculate effective income. Even if there was a gap in the past.
Now for hourly things change a little bit they put an exception. Here that basically says for employees who are paid hourly and whose hours vary, the lender must calculate the effective income. So the income that you show per month to qualify for a home, they're gonna use a lesser of either the average of income in accordance with the hourly standard, which is a two-year average of income. The average income over the previous two years. So they're either going to use a two-year average of your hourly income. Or the average of the income earned since the COVID-related economic event.
So we're gonna use a lesser of those two for your monthly income there. So basically what they're saying is they don't want if you. Earned less money. Since COVID happened, then they're going to run off of those lower figures. You can't just use a higher average over the past two years if your income has declined.
They also go in here and talk about part-time employment, very similar where it's the lesser of the average, which is based on the two-year average or the lower of the average since COVID happened.
Then we move down here into overtime bonuses and tip income. It's gonna be a very similar thing either the average over two years or the average, since COVID, whichever one is less. So you're picking up a trend here. They're gonna average whichever one is lower and you can do this math yourself too.
You can take a look at your income and see. COVID was declared an economic event. What's been the average of your income there versus the average over two years, they're gonna use whichever one is lower as the monthly amount for your income. And this is important because this is how much you're gonna be able to get approved for.
On a mortgage, right? If you're gonna use the lower amount, then you're gonna get approved for a smaller home. And for a lot of people that might not be a big deal, but if you are on the edge of being able to qualify for a loan, it is important to be able to notice this.
So this one is a little bit more detailed. It says the lender may use or may consider self-employment income. If the borrower has had a self-employment history before and after COVID totaling two years. That's not too out of the ordinary here, but it does put in a little note that says for self-employed borrowers that have since regained income at a level, of less than 80% of their income prior to COVID the lender must downgrade in manually underwrite.
So there are two different types of underwriting with FHA loans. It's either an automated approval through AUS, which is underwriting software that underwriters use or it's manually underwritten, which usually requires things like reserves and lowers how much mortgage you can get.
So it's not a terrible thing to have something manually underwritten, but it does take longer to do. You might have a higher interest rate and it's more of a frustrating process. If you have got your income with self-employment to a level at 80% or higher since COVID, then what we're, what they're going to do is request a couple of things in here. So the letter of explanation, for the time period of income loss and then either of the following year to date P and L audited or an unaudited P and L with business bank statements to back it.
For self-employed borrowers with COVID event that has regained income at a level of greater than, or equal to 80% of their income before COVID the lender must calculate the gross self-employment income by using the lesser of the average over the previous two years or the average over the previous six months after the COVID related event.
Then finally, I think what a lot of people have questions about is the gaps in employment or reduction in income. They address that here near the end of page 13.
For non-self-employment income, for borrowers, with gaps in employment, reduction of income, or reduction of hours due to a COVID-19-related economic event, the lender may consider the borrower's income calculated in accordance with the exception. So basically says. for the applicable income type, as effective income, it can verify and document that the borrower has been employed in the current job or same line of work for at least one month, or the borrower has been employed in a different job or line of work for at least six months given that the borrower has two-year work history as well.
So for a lot of people, there was a fear that a gap in employment or reduction in income was gonna disqualify you from a mortgage, and that's not the case. What's gonna end up happening here is they're basically gonna treat this gap. Like it didn't exist, but as long as you're back on the job, and you're making a similar amount of income, then you should be okay if you're running to the point where you're making a strong reduction in income, since COVID as you're back at work, then you might qualify for less.
And that's when you can talk with a lender. If you wanna get connected with a helpful lender. Check out this link: WTHYL - Lender.
So for non-self-employment income, what they're going to require is a written verification of employment. Basically, it's just a couple of sheets of paper that your lender is going to give to your employer. They're gonna fill it out and it's just gonna detail your pay.
So it's gonna break it apart into base pay commission overtime or anything like that, and then document the dates of your employment as well. So that's something that can be used. In addition to your pay stubs or tax returns, W2s, 1099s things like that.
And then for self-employment income, basically what they're gonna do. If you have a gap in self-employment income or a reduction of hours, the lender can exclude those months where the business was closed, or income was reduced when calculating the income here.
Now, the rest of this document goes on to explain the manual underwriting guidelines of FHA loans. So you're welcome to read that if you want to, I'm not gonna run through this whole thing, but feel free to skim through this and go to your section if you're on hourly income or self-employment or overtime or whatever that is. And it's gonna give you a little bit more detail.
Just wanna cover the highlights here. If you wanna learn more about FHA loans, I have a complete guide that walks from the very beginning to the very end. Everything you need to know about FHA loans before you get one.