When you have reduced income due to a temporary situation, you may still be eligible to receive an FHA streamline refinance loan. Understanding the terms under which you would still be eligible can help you refinance the house you own despite your unfortunate plot in life at the moment. This pertains to situations such as a temporary disability or temporary leave of absence from work for personal reasons. In these cases, the FHA might be able to offer you special circumstances when it comes to coming up with your effective income or the income used to qualify you for an FHA mortgage.
What the FHA Streamline Lender Needs
The lender will require a variety of things from you in order to document your temporary reduction in income. These items include:
- A signed statement from you stating that you do intend to return to your previous employment as soon as you are able. It should also state the date that you anticipate that you will return to your employer.
- A signed statement from your employer verifying your intent to return to work and that you still have a job at said employer.
How your Income Works
The difficult part of the situation is that you will have to qualify for the FHA loan based on your reduced income. This means that your disability income or any other type of income that you are receiving in compensation for your injury or illness have to be enough to keep your debt ratio low enough to qualify. Typically, this income is less than what you make on a regular basis, so make sure you take that into account if you are going to apply for an FHA loan while you have reduced income. There are ways that you can reduce your debt ratio with this lower income including:
- Pay off debts to reduce your monthly financial burden
- Keep the price of the house lower than you first anticipated you would be able to afford with your regular income
- Shop around for a lower interest rate to keep your fees down
- Put a larger down payment down if you have the funds to do so
In some cases, your reserves can be used as supplemental income to help you qualify for a loan. The only instance that this is acceptable is when your regular income will not begin before the first mortgage payment becomes due on your new loan. You will need to have ample documentation stating that you will not start receiving your regular income before this date from your employer in order for this to work.
If you get approved, you can use your reserves as a part of your income. You must start off by showing the proof that you have adequate liquid assets available. You can verify this with bank statements over the last 12 months or with a Verification of Deposit that is completed by your bank. The reserves that are able to be used are only the surplus reserves. This means that if you need any of your assets to qualify for the loan, they cannot be used as your surplus reserves. Any money that is left over from that point may be able to be used, though. The money that is left is totaled up and divided amongst the months that remain between when your first mortgage payment is due and when you are expected to receive your regular income again. That supplemental income then gets added to your disability income to help your debt ratio become lower.
The good news is that even with reduced income, you might be able to qualify for an FHA loan. The bad news is it will take a little more work on your part to get it done. You have to have ample documentation stating that you can afford the loan even before you return to work, if that will be the case. Your lower income will have to prevail, so if you are not comfortable shopping for a house in a lower price range because of your lower income, make sure to use one of the above strategies to get your debts lowered, making your debt ratio more attractive even with your lower income. In order to use this program, however, you might have to shop with various lenders as not every lender will be willing to use the reduced income program that the FHA allows.