FHA expands eligibility for those with pandemic income gaps

The Federal Housing Administration on Thursday opened up underwriting guidelines for loans it insures in order to make it easier for people who have recovered from income lapses to qualify.

Those who have had temporary employment losses, or reductions in income or hours during the presidentially declared COVID-19 National Emergency are targeted by the new effort from the Department of Housing and Urban Development. (At the time of this writing, the public health emergency that began on March 13, 2020 was still in effect.)

Normally, qualifications for FHA loans — which play a key role in giving first-time buyers with limited incomes access to homes — are based on income averaged over at least a year, or more for some categories of workers, such as the self-employed. Now it may be possible in some circumstances to exclude a period when income was interrupted or reduced, and qualify only based on the stable pay that’s been earned since that time. Exceptions along those lines are available for salaried, hourly and self-employed professionals employed on a full- or part-time basis.

“Limiting…families’ homeownership opportunities because of the unavoidable impacts of an unprecedented global health crisis, when they are otherwise well-qualified for a mortgage, is unnecessary,” said Federal Housing Commissioner Julia Gordon, in a press release.

The changes, which also account for the needs of workers paid bonus, commission or tip income, officially take effect for FHA case numbers assigned as of Sept. 5, but loans can be made using the new guidelines immediately.

The move is in line with the FHA’s other efforts to provide access to homeownership for buyers who have been under additional financial duress due to the pandemic, while still managing risks to its insurance fund. 

That fund’s capital ratio was at a 14-year high at the close of the last fiscal year, which ended Sept. 30, 2021, but the FHA also has been weighing a potential cut to the premiums that replenish it, in order to address rising affordability concerns.

But to address the need to protect the fund, the leeway the FHA has opened up has some guardrails.

Self-employed workers, for example, must have a total of at least two years worth of income records from before or after the emergency, and if they’ve had a permanent reduction income to less than 80% of their pre-pandemic amount they have to go through a manual underwriting process.

Additional requirements for self-employed workers with income reduction due to a pandemic-related event include a letter of explanation, business tax returns for the most recent two-year period and an audited or unaudited profit-and-loss statement.

An audited statement must include revenue, expenses and net income and be available for the most recent month prior to case number assignment. Borrowers must sign unaudited statements which have similar requirements. Unaudited documentation must also be confirmed by business bank statements for the latest three months on the year-to-date P&L report.