How Does the New Income Rules Affect Your FHA Loan
In the old days, there’re no specific rules on borrowers’ Social Security Income. Your FHA loan applications will be approved as long as you have a steady job. However, things have changed now. The Federal Housing Administration has changed verification rules of Social Security Income in August of 2012. If you’re drawing Social Security benefits to qualify for an FHA loan, the new rules will affect you.
How much do you know about the new rules?
In fact, the Federal Housing Administration only modified the regulations on the verification of Social Security Income to be eligible for FHA mortgages. The new rules are effective on those who are getting an FHA loan after August, 2012. A notice of FHA, titled “Documentation Requirements for Income from the Social Security Administration”, introduces the new rules for Social Security Income documentation and verification.
According to the new rules, various forms of income from the Social Security Administration can be used to qualify the borrower for an FHA loan. Possible income includes Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI) and Social Security Income. However, the income from the Social Security Administration can be used for the application of FHA loans only when the income has been verified.
However, if your income from SSA cannot last for a three year period from the date of your FHA loan application, your income won’t improve your chances of getting approved for an FHA loan.
If you’re planning to draw Supplemental Security Income or Social Security Disability Insurance, your lender will ask you to provide documentation to prove that you’re actually drawing the pay. In addition, your lender must make sure that the income won’t expire within three years after your FHA loan application.
To verify your income, you’ll be required to provide some documents, such as your federal tax returns, your most recent bank statement displaying recipient of income from the SSA and a Proof of Income Letter. Also known as “Budget Letter” and “Benefits Letter”, the Proof of Income Letter is issued by the SSA and evidences income that is drawn from the SSA. If you cannot provide the Proof of Income Letter, a copy of your Social Security Benefit Statement, SSA-1099/1042S is okay as well.
These documents are only used for the verification of income. According to the new rules, your lender also needs to determine the length of time you’re able to receive the benefits from Social Security. In order to document the continuance of your social security income, your lender will request you to provide either of the two documents below:
• A copy of the last Notice of Award letter, which will show the SSA’s final decision on your eligibility for SSA income, or
• Any equivalent document to state that you qualify for the benefits from SSA
If your income from the SSA cannot continue beyond three years from the date of your FHA home loan application, your income would not be included in verifiable income. On the contrary, the income will only serve as a compensating factor that might affect your FHA loan approval.
How will the new rules affect future FHA loan applicants?
The new rules on the verification of Social Security Income will affect those who submit FHA loan applications after August. Under the new rules, lenders must verify borrowers’ income by checking some necessary documents. Though the verifiable income from SSI can be counted towards the total income, borrowers have to provide more documents, such as a Proof of Income Letter from SSI. The process will be much more complicated.
Compared with old requirements, the new rules also require borrowers to submit the last Notice of Award letter from SSA to show the expiration date for their SSDI or SSI benefits. If the expiration date is not clear, no additional documentation will be required. However, if it’s stated that your benefits will not continue for three years by the application date, the verifiable income cannot be used to qualify you for an FHA loan.
In the older days, it does not matter whether your Social Security Income will last for a 3-year period after the date of your FHA loan application.
So if you’re drawing SSI or SSDI to prepare for the FHA loan application, make sure to collect all possible documents for the verification of total income and continuance of that income. If you do not have any of the required documentation, your FHA loan application may be turned down due to income issues.
If you’re still not sure how the new rules will affect your application, contact your FHA lender and you’ll get every possible detail about the new rules.
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