FHA Loan Houston Blog

Here are some FHA guidelines in regards to calculating income.

Its CRUCIAL to be able to calculate income correctly and UP FRONT at the time of application because this can save everyone a lot of money and headaches when done correctly.

Individual Tax Returns (IRS Form 1040).

The amount shown on the IRS Form 1040 as “adjusted gross income” either must be increased or decreased, based on the lender’s analysis of the individual tax returns and any related tax schedules. Particular attention must be paid to the following:

a. Wages, Salaries, and Tips. An amount shown under this heading may indicate that the individual is a salaried employee of a corporation or has other sources of income. It also may indicate that the spouse is employed, in which case the income must be subtracted from the adjusted gross income in the analysis.

b. Business Income or Loss (from Schedule C). The sole proprietorship income calculated on Schedule C is business income. Depreciation or depletion may be added back to adjusted gross income.

c. Rents, Royalties, Partnerships, Etc. (from Schedule E). Any income received from rental properties or royalties may be used as income after adding back any depreciation shown on Schedule E.

d. Capital Gain or Loss (from Schedule D). This transaction generally occurs only one time, and it should not be considered in determining effective income. However, if the business has a constant turnover of assets resulting in gains or losses, the capital gain or loss may be considered in determining the income, provided the borrower has at least three years’ tax returns evidencing capital gains. An example includes an individual who purchases old houses, remodels them, and sells them for a profit.

e. Interest and Dividend Income (from Schedule B). This income, which is taxable and tax-exempt, may be added back to the adjusted gross income only if it has been received for the past two years and is expected to continue. (If the interest-bearing asset will be liquidated as a source of the cash investment, the lender must adjust accordingly.)

f. Farm Income or Loss (from Schedule F). Any depreciation shown on Schedule F may be added back to the adjusted gross income.

g. IRA Distributions, Pensions, Annuities, and Social Security Benefits. The nontaxable portion of these items may be added back to the adjusted gross income, if the income is expected to continue for the first three years of the mortgage.

h. Adjustments to Income. Certain adjustments to income shown on the IRS Form 1040 may be added back to the adjusted gross income. Among these adjustments are IRA and Keogh retirement deductions, penalties on early withdrawal of savings, health insurance deductions, and alimony payments.

i. Employee Business Expenses. These expenses are actual cash expenses that must be deducted from the borrower’s adjusted gross income.