The Federal Housing Authority considers the so-called four Cs of credit when evaluating a prospective borrower's mortgage loan application: credit history, capacity to repay, cash to close and collateral. It looks at your income and assets when assessing your capacity to repay and cash for closing. FHA underwriting guidelines allow the lender to consider income from investments. They also allow you to use cash from investments for closing. The guidelines do not limit the proportion of your income or closing cash you may derive from investments. However, in some cases the guidelines for closing cash limit the amount you can withdraw from an investment account.
You can use payments from retirement accounts as income as long as you provide documentation that verifies the sources of the income. If the benefits expire within three years, you can still report the payments to strengthen your application, but you won't be able to use them toward meeting your income requirements.
If you're collecting payments on a note, you can use the note as income on your loan application. You'll need to provide a copy of the note, documentation proving at least one year's worth of consistent payments. If you're not the original payee, you'll need to provide evidence that you're the current payee, and that you have the right to enforce the note.
The FHA considers the rent you collect as income as long as you can show that the income is likely to be consistent. Evidence of consistency might include leases, documentation of at least two years' rental history, with no vacancies lasting more than three months unless you rent seasonally, or can verify that you took the property off the market for renovations. Income from boarders in your primary home is also allowable, as long as the boarder is a relative of yours, and you claim the income on your tax return.
Investment Cash for Closing
You can use such accounts as an individual retirement account, savings plans, 401(k) and Keogh accounts as a source of cash for closing. However, the underwriter will only consider 60 percent of the account balances as available cash, unless you can prove that you can draw more and still pay taxes and penalties from the balance. The FHA allows you to use cash from stocks and bonds as well. You'll use your quarterly statements as evidence that the funds exist and to show their value, but your loan will be conditional on the lender's ability to verify that you've received them.
If the loan is for a home you're exercising a purchase option to buy, you can have rent credit you can count toward your closing cash. You've earned rent credit if the total amount of rent you've paid exceeds the fair-market value of the property as determined by an independent appraisal. You must have paid market value rent during your entire period of tenancy.
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