FHA Single Family Housing Policy Handbook 4000.1, Part II — e. Effective Income Analysis (04/10/2025)

FHA Single Family Housing Policy Handbook 4000.1, Part II — e. Effective Income Analysis (04/10/2025)

e. Effective Income Analysis (04/10/2025) i. Definition Effective Income refers to income that may be used to evaluate a Borrower for a HECM. Effective Income Analysis refers to the calculation of Effective Income used to calculate Residual Income. Effective Income must be reasonably likely to continue through at least the first three years of the HECM, and meet the specific requirements described below. Tax Return refers to a U.S. federal income tax return or, for Borrowers who reside in Puerto Rico, Guam, the Virgin Islands, the Commonwealth of the Northern Mariana Islands, or American Samoa and who are not required to file U.S. federal income taxes, the Mortgagee must obtain the equivalent tax filing for the territory (a territory tax return). ii. General Income Requirements The Mortgagee must document the Borrower’s income and employment history, verify the accuracy of the amounts of income reported, and determine if the income can be considered as Effective Income in accordance with the requirements listed below. The Mortgagee may only consider income if it is legally derived and, when required, properly reported as income on the Borrower’s Tax Returns. Negative income must be subtracted from the Borrower’s gross monthly income and not treated as a recurring monthly liability unless otherwise noted. If the Mortgagee can determine that the Borrower’s Residual Income meets the applicable standard for their family size and geographic region based on documentation for one or more specific sources described below, it need not pursue documentation for additional sources of income. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 642 Last Revised: 11/26/2025 If FHA requires Tax Returns as required documentation for any type of Effective Income, the Mortgagee must also analyze the Tax Returns in accordance with Appendix 2.0 – Analyzing IRS Forms. If the income documents are not received in English, the Mortgagee must provide a complete and accurate translation for each document. (A) Employment Income (1) Definition Employment Income refers to income received as an employee of a business that is reported on IRS Form W-2, Wage and Tax Statement. (2) Standard The Mortgagee may use Employment Income as Effective Income in accordance with the standards provided for each type of Employment Income. (3) Required Documentation For all Employment Income, the Mortgagee must verify the Borrower’s most recent two years of employment and income, and document current employment using either the traditional or alternative method, and past employment as applicable. (a) Traditional Current Employment Documentation The Mortgagee must obtain one of the following to verify current employment and income: • the most recent pay stubs covering a minimum of 30 consecutive Days (if paid weekly or biweekly, pay stubs must cover a minimum of 28 consecutive Days) that show the Borrower’s year-to-date earnings, and a written Verification of Employment (VOE) covering two years; or • direct electronic verification of employment by a TPV vendor covering two years, subject to the following requirements: • the Borrower has authorized the Mortgagee to verify income and employment; and • the date of the data contained in the completed verification conforms with FHA requirements at Maximum Age of HECM Documents. Reverification of employment must be completed within 10 Days prior to mortgage Disbursement. Verbal or electronic reverification of employment is acceptable. Electronic reverification employment data must be current within 30 days of the date of the verification. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 643 Last Revised: 11/26/2025 (b) Alternative Current Employment Documentation If using alternative documentation, the Mortgagee must: • obtain copies of the pay stubs covering the most recent 30 consecutive Days (if paid weekly or bi-weekly, pay stubs must cover a minimum of 28 consecutive Days) that show the Borrower’s year-to-date earnings; • obtain copies of the original IRS Form W-2s from the previous two years; and • document current employment by telephone, sign and date the verification documentation, and note the name, title, and telephone number of the person with whom employment was verified. Reverification of employment must be completed within 10 Days prior to the date of the Note. Verbal or electronic reverification of employment is acceptable. Electronic reverification employment data must be current within 30 days of the date of the verification. (c) Past Employment Documentation Direct verification of the Borrower’s employment and income history for the previous two years is not required if all of the following conditions are met: • the current employer confirms a two-year employment history, or a paystub reflects a hiring date; • only base pay is used to qualify (no Overtime, Bonus, or Tip Income); and • the Borrower executes IRS Form 4506, Request for Copy of Tax Return, IRS Form 4506-T, Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two tax years. If the applicant has not been employed with the same employer for the previous two years and/or not all conditions immediately above can be met, then the Mortgagee must obtain one or a combination of the following for the most recent two years to verify the applicant’s employment history: • IRS Form W-2(s); • written VOE(s); • direct verification of employment by a TPV vendor, subject to the following requirements: • the Borrower has authorized the Mortgagee to verify income and employment; • the date of the data contained in the completed verification conforms with FHA requirements at Maximum Age of HECM Documents; and/or • evidence supporting enrollment in school or the military during the most recent two full years. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 644 Last Revised: 11/26/2025 (B) Primary Employment (1) Definition Primary Employment is the Borrower’s principal employment, unless the income falls within a specific category identified below. Primary employment is generally full-time employment and may be either salaried or hourly. (2) Standard The Mortgagee may use primary Employment Income as Effective Income. (3) Calculation of Effective Income (a) Salary For employees who are salaried and whose income has been and will likely be consistently earned, the Mortgagee must use the current salary to calculate Effective Income. (b) Hourly For employees who are paid hourly and whose hours do not vary, the Mortgagee must consider the Borrower’s current hourly rate to calculate Effective Income. For employees who are paid hourly and whose hours vary, the Mortgagee must use the average of the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use the most recent 12-month average of hours at the current pay rate. (C) Part-Time Employment (1) Definition Part-Time Employment refers to employment that is not the Borrower’s primary employment and is generally performed for less than 40 hours per week. (2) Standard The Mortgagee may use Employment Income from Part-Time Employment as Effective Income if the Borrower has worked a part-time job uninterrupted for the past two years and the current position is reasonably likely to continue. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 645 Last Revised: 11/26/2025 (3) Calculation of Effective Income The Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate, the Mortgagee may use a 12- month average of hours at the current pay rate. (D) Overtime, Bonus, or Tip Income (1) Definition Overtime, Bonus, or Tip Income refers to income that the Borrower receives in addition to the Borrower’s normal salary. (2) Standard The Mortgagee may use Overtime, Bonus, or Tip Income as Effective Income if the Borrower has received this income for the past two years and it is reasonably likely to continue. Periods of Overtime, Bonus, or Tip Income less than two years may be considered Effective Income if the Mortgagee documents that the Overtime, Bonus, or Tip Income has been consistently earned over a period of not less than one year and is reasonably likely to continue. (3) Calculation of Effective Income For employees with Overtime, Bonus or Tip Income, the Mortgagee must calculate the Effective Income by using the lesser of: • the average Overtime, Bonus or Tip Income earned over the previous two years, or, if less than two years, the length of time Overtime, Bonus or Tip Income has been earned; or • the average Overtime, Bonus or Tip Income earned over the previous year. (E) Seasonal Employment (1) Definition Seasonal Employment refers to employment that is not year round, regardless of the number of hours per week the Borrower works on the job. (2) Standard The Mortgagee may consider Employment Income from Seasonal Employment as Effective Income if the Borrower has worked the same line of work for the past two years and is reasonably likely to be rehired for the next season. The Mortgagee may consider unemployment income as Effective Income for those with Effective Income from Seasonal Employment. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 646 Last Revised: 11/26/2025 (3) Required Documentation For seasonal employees with unemployment income, the Mortgagee must document the unemployment income for two full years and there must be reasonable assurance that this income will continue. (4) Calculation of Effective Income For employees with Employment Income from Seasonal Employment, the Mortgagee must average the income earned over the previous two full years to calculate Effective Income. (F) Employer Housing Subsidy (1) Definition Employer Housing Subsidy refers to employer-provided mortgage assistance. (2) Standard The Mortgagee may utilize Employer Housing Subsidy as Effective Income. (3) Required Documentation The Mortgagee must verify and document the existence and the amount of the housing subsidy. (4) Calculation of Effective Income For employees receiving an Employer Housing Subsidy, the Mortgagee may add the Employer Housing Subsidy to the total Effective Income. (G) Employed by Family-Owned Business (1) Definition Family-Owned Business Income refers to Employment Income earned from a business owned by the Borrower’s family, but in which the Borrower is not an owner. (2) Standard The Mortgagee may consider Family-Owned Business Income as Effective Income if the Borrower is not an owner in the family-owned business. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 647 Last Revised: 11/26/2025 (3) Required Documentation The Mortgagee must verify and document that the Borrower is not an owner in the family-owned business by using official business documents showing the ownership percentage. Official business documents include corporate resolutions or other business organizational documents, business Tax Returns or Schedule K-1 (IRS Form 1065), U.S. Return of Partnership Income, or an official letter from a certified public accountant on their business letterhead. In addition to traditional or alternative documentation requirements, the Mortgagee must obtain copies of signed personal Tax Returns or tax transcripts. (4) Calculation of Effective Income (a) Salary For employees who are salaried and whose income has been and will likely continue to be consistently earned, the Mortgagee must use the current salary to calculate Effective Income. (b) Hourly For employees who are paid hourly and whose hours do not vary, the Mortgagee must consider the Borrower’s current hourly rate to calculate Effective Income. For employees who are paid hourly and whose hours vary, the Mortgagee must average the income over the previous two years. If the Mortgagee can document an increase in pay rate the Mortgagee may use the most recent 12- month average of hours at the current pay rate. (H) Commission Income (1) Definition Commission Income refers to income that is paid contingent upon the conducting of a business transaction or the performance of a service. (2) Standard The Mortgagee may use Commission Income as Effective Income if the Borrower earned the income for at least one year in the same or similar line of work and it is reasonably likely to continue. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 648 Last Revised: 11/26/2025 (3) Required Documentation For all Commission Income, the Mortgagee must use traditional or alternative employment documentation. (4) Calculation of Effective Income The Mortgagee must calculate Effective Income for commission by using the lesser of: • the average Commission Income earned over either: • the previous two years; or • the length of time Commission Income has been earned if less than two years; or • the average Commission Income earned over the previous one year. (I) Self-Employment Income (1) Definition Self-Employment Income refers to income generated by a business in which the Borrower has a 25 percent or greater ownership interest. There are four basic types of business structures. They include: • sole proprietorships; • corporations; • limited liability or “S” corporations; and • partnerships. (2) Standard (a) Minimum Length of Self-Employment The Mortgagee may consider Self-Employment Income if the Borrower has been self-employed for at least two years. If the Borrower has been self-employed between one and two years, the Mortgagee may only consider the income as Effective Income if the Borrower was previously employed in the same line of work in which the Borrower is self-employed or in a related occupation for at least two years. (b) Stability of Self-Employment Income Income obtained from businesses with annual earnings that are stable or increasing is acceptable. If the income from businesses shows a greater than 20 percent decline in Effective Income over the analysis period, the Mortgagee must document that the business income is now stable. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 649 Last Revised: 11/26/2025 A Mortgagee may consider income as stable after a 20 percent reduction if the Mortgagee can document the reduction in income was the result of an Extenuating Circumstance, and the Borrower can demonstrate the income has been stable or increasing for a minimum of 12 months. (3) Required Documentation (a) Individual and Business Tax Returns The Mortgagee must obtain complete individual Tax Returns for the most recent two years, including all schedules. In lieu of signed individual or business Tax Returns from the Borrower, the Mortgagee may obtain a signed IRS Form 4506, IRS Form 4506-C, or IRS Form 8821, and tax transcripts directly from the IRS. (b) Profit & Loss Statements and Balance Sheets The Mortgagee must obtain a year-to-date Profit and Loss (P&L) statement and balance sheet if more than a calendar quarter has elapsed since the date of the most recent calendar or fiscal year-end tax period. A balance sheet is not required for self-employed Borrowers filing Schedule C income. If income used to qualify the Borrower exceeds the two-year average of Tax Returns, an audited P&L or signed quarterly Tax Return obtained from the IRS is required. (c) Business Credit Reports The Mortgagee must obtain a business credit report for all corporations and “S” corporations. (4) Calculation of Effective Income The Mortgagee must analyze the Borrower’s Tax Returns to determine gross Self-Employment Income. Requirements for analyzing self-employment documentation are found in Analyzing IRS Forms. The Mortgagee must calculate gross Self-Employment Income by using the lesser of: • the average gross Self- Employment Income earned over either: • the previous two years; or • the length of time Self-Employment Income has been earned if less than two years (where permitted); or • the average gross Self-Employment Income earned over the previous one year. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 650 Last Revised: 11/26/2025 (J) Additional Required Analysis of Stability of Employment Income (1) Frequent Changes in Employment If the Borrower has changed employers more than three times in the previous 12- month period, or has changed lines of work, the Mortgagee must take additional steps to verify and document the stability of the Borrower’s Employment Income. Additional analysis is not required for fields of employment that regularly require a Borrower to work for various employers (such as Temp Companies or Union Trades). The Mortgagee must obtain: • transcripts of training and education demonstrating qualification for a new position; or • employment documentation evidencing continual increases in income and/or benefits. (2) Addressing Gaps in Employment For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrower’s current income as Effective Income if it can verify and document: • the Borrower has been employed in the current line of work for at least six months at the time of case number assignment; and • a two-year work history prior to the absence from employment using standard or alternative employment verification. (3) Returning to Work After Retirement Mortgagees may consider the income of Borrowers who have returned to work after retirement of more than two years if it can verify and document that: • the Borrower has been employed in the current job for at least six months at the time of case number assignment; • the Borrower intends to continue working; and • the Borrower’s employer expects the Borrower’s employment to continue. (4) Addressing Temporary Reduction in Income For Borrowers with a temporary reduction of income due to a short-term disability or similar temporary leave, the Mortgagee may consider the Borrower’s current income as Effective Income if it can verify and document that: • the Borrower intends to return to work; • the Borrower has the right to return to work; and • the Borrower meets the applicable Residual Income standard for their family size and geographic region, taking into account any reduction of income due to the circumstance. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 651 Last Revised: 11/26/2025 For federal, state, tribal, or local government employees temporarily out of work due to a government shutdown or other similar, temporary events (where lost income is anticipated to be recovered), income preceding the shutdown can be considered as Effective Income. Required Documentation The Mortgagee must provide the following documentation for Borrowers on temporary leave: • a written statement from the Borrower confirming the Borrower’s intent to return to work, and the intended date of return; • documentation generated by current employer confirming the Borrower’s eligibility to return to current employer after temporary leave; and • documentation of sufficient liquid assets, in accordance with Acceptable Sources of Funds used to supplement the Borrower’s income through intended date of return to work with current employer. (K) Other Sources of Effective Income (1) Disability Benefits (a) Definition Disability Benefits refer to benefits received from the SSA, VA, or a private disability insurance provider. (b) Required Documentation The Mortgagee must verify and document the Borrower’s receipt of benefits from the SSA, VA, or private disability insurance provider. The Mortgagee must obtain documentation that establishes award benefits to the Borrower. If any disability income is due to expire within three years from the date of mortgage application, that income cannot be used as Effective Income. If the Notice of Award or equivalent document does not have a defined expiration date, the Mortgagee may consider the income effective and reasonably likely to continue. The Mortgagee may not rely upon a pending or current re- evaluation of medical eligibility for benefit payments as evidence that the benefit payment is not reasonably likely to continue. Under no circumstance may the Mortgagee inquire into or request documentation concerning the nature of the disability or the medical condition of the Borrower. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 652 Last Revised: 11/26/2025 (i) Social Security Disability For Social Security Disability income, including Supplemental Security Income (SSI), the Mortgagee must obtain a copy of the last Notice of Award letter, or an equivalent document that establishes award benefits to the Borrower, and one of the following documents: • Tax Returns; • the most recent bank statement evidencing receipt of income from the SSA; • a Proof of Income Letter, also known as a “Budget Letter” or “Benefits Letter” that evidences income from the SSA; or • a copy of the Borrower’s form SSA-1099/1042S, Social Security Benefit Statement. (ii) Department of Veterans Affairs Disability For VA disability benefits, the Mortgagee must obtain from the Borrower a copy of the veteran’s last Benefits Letter showing the amount of the assistance, and one of the following documents: • Tax Returns; or • the most recent bank statement evidencing receipt of income from the VA. If the Benefits Letter does not have a defined expiration date, the Mortgagee may consider the income effective and reasonably likely to continue for at least three years. (iii)Private Disability For private disability benefits, the Mortgagee must obtain documentation from the private disability insurance provider showing the amount of the assistance and the expiration date of the benefits, if any, and one of the following documents: • Tax Returns; or • the most recent bank statement evidencing receipt of income from the insurance provider. (c) Calculation of Effective Income The Mortgagee must use the most recent amount of benefits received to calculate Effective Income. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 653 Last Revised: 11/26/2025 (2) Alimony, Child Support, and Maintenance Income (a) Definition Alimony, Child Support, and Maintenance Income refers to income received from a former spouse or partner or from a noncustodial parent of the Borrower’s minor dependent. (b) Required Documentation The Mortgagee must obtain a fully executed copy of the Borrower’s final divorce decree, legal separation agreement, court order, or voluntary payment agreement with documented receipt. When using a final divorce decree, legal separation agreement, or court order, the Mortgagee must obtain evidence of receipt using deposits on bank statements, canceled checks, or documentation from the child support agency for the most recent three months that supports the amount used in qualifying. The Mortgagee must document the voluntary payment agreement with 12 months of canceled checks, deposit slips, or Tax Returns. The Mortgagee must provide evidence that the claimed income will continue for at least three years. The Mortgagee may use the front and pertinent pages of the divorce decree, settlement agreement, or court order showing the financial details. (c) Calculation of Effective Income When using a final divorce decree, legal separation agreement, or court order, if the Borrower has received consistent Alimony, Child Support, and Maintenance Income for the most recent three months, the Mortgagee may use the current payment to calculate Effective Income. When using evidence of voluntary payments, if the Borrower has received consistent Alimony, Child Support, and Maintenance Income for the most recent six months, the Mortgagee may use the current payment to calculate Effective Income. If the Alimony, Child Support, and Maintenance Income have not been consistently received for the most recent three months if court ordered or six months if voluntary, the Mortgagee must use the average of the income received over the previous two years to calculate Effective Income. If Alimony, Child Support, and Maintenance Income have been received for less than two years, the Mortgagee must use the average over the time of receipt. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 654 Last Revised: 11/26/2025 (3) Military Income (a) Definition Military Income refers to income received by military personnel during their period of active, Reserve, or National Guard service, including: • base pay • Basic Allowance for Housing • clothing allowances • flight or hazard pay • Basic Allowance for Subsistence • proficiency pay The Mortgagee may not use education benefits as Effective Income. (b) Required Documentation The Mortgagee must obtain a copy of the Borrower’s military Leave and Earnings Statement (LES). The Mortgagee must verify the Expiration Term of Service date on the LES. If the Expiration Term of Service date is within the first 12 months of the HECM, Military Income may only be considered Effective Income if the Borrower represents their intent to continue military service. (c) Calculation of Effective Income The Mortgagee must use the current amount of Military Income received to calculate Effective Income. (4) Other Public Assistance (a) Definition Public Assistance refers to income received from government assistance programs. (b) Required Documentation Mortgagees must verify and document the income received from the government agency. If any Public Assistance income is due to expire within three years from the date of mortgage application, that income cannot be used as Effective Income. If the documentation does not have a defined expiration date, the Mortgagee may consider the income effective and reasonably likely to continue. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 655 Last Revised: 11/26/2025 (c) Calculation of Effective Income The Mortgagee must use the current rate of Public Assistance received to calculate Effective Income. (5) Automobile Allowances (a) Definition Automobile Allowance refers to the funds provided by the Borrower’s employer for automobile related expenses. (b) Required Documentation The Mortgagee must verify and document the Automobile Allowance received from the employer for the previous two years. (c) Calculation of Effective Income The Mortgagee must use the full amount of the Automobile Allowance to calculate Effective Income. (6) Retirement Income Retirement Income refers to income received from Pensions, 401(k) distributions, and Social Security. (a) Social Security Income (i) Definition Social Security Income or Supplemental Security Income (SSI) refers to income received from the SSA other than disability income. (ii) Required Documentation The Mortgagee must verify and document the Borrower’s receipt of income from the SSA. For SSI, the Mortgagee must obtain any one of the following documents: • Tax Returns; • the most recent bank statement evidencing receipt of income from the SSA; • a Proof of Income Letter, also known as a “Budget Letter” or “Benefits Letter” that evidences income from the SSA; or • a copy of the Borrower’s form SSA-1099/1042S. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 656 Last Revised: 11/26/2025 In addition to verification of income, the Mortgagee must document the continuance of this income by obtaining from the Borrower (1) a copy of the last Notice of Award letter which states the SSA’s determination on the Borrower’s eligibility for SSA income, or (2) equivalent documentation that establishes award benefits to the Borrower (equivalent document). If any income from the SSA is due to expire within three years from the date of case number assignment, that income may not be used for qualifying. If the Notice of Award or equivalent document does not have a defined expiration date, the Mortgagee must consider the income effective and reasonably likely to continue. The Mortgagee may not request additional documentation from the Borrower to demonstrate continuance of SSA income. If the Notice of Award letter or equivalent document specifies a future start date for receipt of income, this income may only be considered effective on the specified start date. (iii)Calculation of Effective Income The Mortgagee must use the current amount of Social Security Income received to calculate Effective Income. (b) Pension (i) Definition Pension refers to income received from the Borrower’s former employer(s). (ii) Required Documentation The Mortgagee must verify and document the Borrower’s receipt of periodic payments from the Borrower’s Pension and that the payments are likely to continue for at least three years. The Mortgagee must obtain any one of the following documents: • Tax Returns; • the most recent bank statement evidencing receipt of income from the former employer; or • a copy of the Borrower’s Pension/retirement letter from the former employer. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 657 Last Revised: 11/26/2025 (iii)Calculation of Effective Income The Mortgagee must use the current amount of Pension income received to calculate Effective Income. If the source of the Pension income is a municipal, state, or the federal government, the Mortgagee must consider the income reasonably likely to continue. The Mortgagee is not required to request additional documentation from the Borrower to demonstrate continuance of income from government Pension income. (c) Individual Retirement Account and 401(k) (i) Definition Individual Retirement Account (IRA)/401(k) Income refers to income received from an IRA. (ii) Required Documentation The Mortgagee must verify and document the Borrower’s receipt of recurring IRA/401(k) distribution Income and that it is reasonably likely to continue for three years. The Mortgagee must obtain the most recent IRA/401(k) statement and any one of the following documents: • Tax Returns; or • the most recent bank statement evidencing receipt of income. (iii)Calculation of Effective Income For Borrowers with IRA/401(k) Income that has been and will be consistently received, the Mortgagee must use the current amount of IRA Income received to calculate Effective Income. For Borrowers with fluctuating IRA/401(k) Income, the Mortgagee must use the average of the IRA/401(k) Income received over the previous two years to calculate Effective Income. If IRA/401(k) Income has been received for less than two years, the Mortgagee must use the average over the time of receipt. (7) Rental Income (a) Definition Rental Income refers to income received or to be received from the subject Property or other real estate holdings. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 658 Last Revised: 11/26/2025 (b) Rental Income Received from the Subject Property (i) Standard The Mortgagee may consider Rental Income from existing and prospective renters if documented in accordance with the following requirements. Rental Income from the subject Property may be considered Effective Income when the Property is a one-unit dwelling with an ADU or two- to four-unit dwelling. No income from commercial space may be included in Rental Income calculations. (ii) Required Documentation Required documentation varies depending upon the length of time the Borrower has owned the Property. Limited or No History of Rental Income Where the Borrower does not have a history of Rental Income from the subject since the previous tax filing: Two- to Four-Units The Mortgagee must verify and document the proposed Rental Income by obtaining an appraisal showing fair market rent (use Fannie Mae Form 1025/Freddie Mac Form 72, Small Residential Income Property Appraisal Report) and, if available, the prospective leases. One-Unit The Mortgagee must verify and document the proposed Rental Income by obtaining a Fannie Mae Form 1004/Freddie Mac Form 70, Uniform Residential Appraisal Report (URAR), and a Fannie Mae Form 1007/Freddie Mac Form 1000, Single Family Comparable Rent Schedule, showing fair market rent and, if available, the prospective leases. One-Unit with an Accessory Dwelling Unit The Mortgagee must verify and document the proposed Rental Income by obtaining a Fannie Mae Form 1004/Freddie Mac Form 70, Uniform Residential Appraisal Report (URAR), and a Fannie Mae Form 1007/Freddie Mac Form 1000, Single Family Comparable Rent Schedule, showing fair market rent and, if available, the prospective leases. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 659 Last Revised: 11/26/2025 History of Rental Income Where the Borrower has a history of Rental Income from the subject Property since the previous tax filing, the Mortgagee must verify and document the existing Rental Income by obtaining the existing lease, rental history over the previous 24 months that is free of unexplained gaps greater than three months (such gaps could be explained by student, seasonal or military renters, or property rehabilitation), and the Borrower’s most recent Tax Returns, including Schedule E, from the previous two years. For Properties owned less than two years, the Mortgagee must document the date of acquisition by providing the deed, Closing Disclosure, or other legal document. (iii)Calculation of Effective Income The Mortgagee must add the net subject Property Rental Income to the Borrower’s gross income to calculate Effective Income. Limited or No History of Rental Income To calculate the Effective Income from the subject Property where the Borrower does not have a history of Rental Income from the subject Property since the previous tax filing, the Mortgagee must use 75 percent of the lesser of: • fair market rent reported by the Appraiser; or • the rent reflected in the lease or other rental agreement. One-Unit with an Accessory Dwelling Unit The amount of the Rental Income from an ADU used as Effective Income must not exceed 30 percent of the total monthly Effective Income. History of Rental Income The Mortgagee must calculate the Rental Income by averaging the amount shown on the Schedule E. Depreciation, mortgage interest, taxes, insurance, and any HOA dues shown on Schedule E may be added back to the net income or loss. If the Property has been owned for less than two years, the Mortgagee must annualize the Rental Income for the length of time the Property has been owned. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 660 Last Revised: 11/26/2025 (c) Rental Income from Other Real Estate Holdings (i) Standard Rental Income from other real estate holdings may be considered Effective Income if the documentation requirements listed below are met. If Rental Income is being derived from the Property being vacated by the Borrower, the Borrower must be relocating to an area more than 100 miles from the Borrower’s current Principal Residence. (ii) Required Documentation The Mortgagee must obtain a lease agreement of at least one year’s duration after the HECM is closed and evidence of the payment of the security deposit or first month’s rent. Limited or No History of Rental Income Where the Borrower does not have a history of Rental Income for the Property since the previous tax filing, including Property being vacated by the Borrower, the Mortgagee must obtain an appraisal evidencing market rent and that the Borrower has at least 25 percent equity in the Property. The appraisal is not required to be completed by an FHA Roster Appraiser. Two- to Four-Units The Mortgagee must verify and document the proposed Rental Income by obtaining an appraisal showing fair market rent (use Fannie Mae Form 1025/Freddie Mac Form 72, Small Residential Income Property Appraisal Report) and, if available, the prospective leases. One Unit or One-Unit with an Accessory Dwelling Unit The Mortgagee must verify and document the proposed Rental Income by obtaining a Fannie Mae Form 1004/Freddie Mac Form 70, Uniform Residential Appraisal Report (URAR), and a Fannie Mae Form 1007/Freddie Mac Form 1000, Single-Family Comparable Rent Schedule, showing fair market rent and, if available, the prospective lease. History of Rental Income The Mortgagee must obtain the Borrower’s last two years’ Tax Returns with Schedule E. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 661 Last Revised: 11/26/2025 (iii)Calculation of Effective Net Rental Income Limited or No History of Rental Income To calculate the effective net Rental Income from other real estate holdings where the Borrower does not have a history of Rental Income since the previous tax filing, the Mortgagee must deduct the Principal, Interest, Taxes, and Insurance (PITI) from 75 percent of the lesser of: • fair market rent reported by the Appraiser; or • the rent reflected in the lease or other rental agreement. History of Net Rental Income The Mortgagee must calculate the net Rental Income by averaging the amount shown on the Schedule E, provided the Borrower continues to own all Properties included on the Schedule E. Depreciation, mortgage interest, taxes, insurance, and any HOA dues shown on Schedule E may be added back to the net income or loss. Positive net Rental Income must be added to the Borrower’s Effective Income. Negative net Rental Income must be included as a debt/liability. If the Property has been owned for less than two years, the Mortgagee must: • annualize the Rental Income for the length of time the Property has been owned; and • document the date of acquisition by providing the deed, Closing Disclosure, or other legal document. (d) Boarders of the Subject Property (i) Definition Boarder refers to an individual renting space inside the Borrower’s Dwelling Unit. A renter of an ADU is not a Boarder. (ii) Standard Rental Income from Boarders is only acceptable if the Borrower has a two-year history of receiving income from Boarders that is shown on the Tax Return and the Borrower is currently receiving Boarder income. (iii)Required Documentation The Mortgagee must obtain two years of the Borrower’s Tax Returns evidencing income from Boarders and the current lease. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 662 Last Revised: 11/26/2025 (iv) Calculation of Effective Income The Mortgagee must calculate the Effective Income by using the lesser of the two-year average or the current lease. (8) Investment Income (a) Definition Investment Income refers to interest and dividend income received from assets such as certificates of deposits, mutual funds, stocks, bonds, money markets, and savings and checking accounts. (b) Required Documentation The Mortgagee must verify and document the Borrower’s Investment Income by obtaining Tax Returns for the previous two years and the most recent account statement. (c) Calculation of Effective Income The Mortgagee must calculate Investment Income by using the lesser of: • the average Investment Income earned over the previous two years; or • the average Investment Income earned over the previous one year. The Mortgagee must subtract any of the assets used for the Borrower’s required funds to close to purchase the subject Property or where the Borrower is otherwise required to bring cash to closing from the Borrower’s liquid assets prior to calculating any interest or dividend income. (9) Capital Gains and Losses (a) Definitions Capital Gains refer to a profit that results from a disposition of a capital asset, such as a stock, bond, or real estate, where the amount realized on the disposition exceeds the purchase price. Capital Losses refer to a loss that results from a disposition of a capital asset, such as a stock, bond, or real estate, where the amount realized on the disposition is less than the purchase price. (b) Standard Capital gains or losses must be considered when determining Effective Income, when the individual has a constant turnover of assets resulting in gains or losses. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 663 Last Revised: 11/26/2025 (c) Required Documentation Three years’ Tax Returns are required to evaluate an earnings trend. If the trend: • results in a gain, it may be added as Effective Income; or • consistently shows a loss, it must be deducted from the total income. (10) Expected Income (a) Definition Expected Income refers to income from cost-of-living adjustments, performance raises, a new job, or retirement that has not been, but will be received within 60 Days of mortgage closing. (b) Standard The Mortgagee may consider Expected Income as Effective Income except when Expected Income is to be derived from a family-owned business. (c) Required Documentation The Mortgagee must verify and document the existence and amount of Expected Income with the employer in writing and that it is guaranteed to begin within 60 Days of mortgage closing. For expected Retirement Income, the Mortgagee must verify the amount and that it is guaranteed to begin within 60 Days of the mortgage closing. (d) Calculation of Effective Income Income is calculated in accordance with the standards for the type of income being received. The Mortgagee must also verify that the Borrower will have sufficient income or Cash Reserves to meet their obligations between HECM closing and the beginning of the receipt of the income. (11) Trust Income (a) Definition Trust Income refers to income that is regularly distributed to a Borrower from a trust. (b) Required Documentation The Mortgagee must verify and document the existence of the Trust Agreement or other trustee statement. The Mortgagee must also verify and II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 664 Last Revised: 11/26/2025 document the frequency, duration, and amount of the distribution by obtaining a bank statement or transaction history from the bank. The Mortgagee must verify that regular payments will continue for at least the first three years of the mortgage term. (c) Calculation of Effective Income The Mortgagee must use the income based on the terms and conditions in the Trust Agreement or other trustee statement to calculate Effective Income. (12) Annuities or Similar (a) Definition Annuity Income refers to a fixed sum of money periodically paid to the Borrower from a source other than employment. (b) Required Documentation The Mortgagee must verify and document the legal agreement establishing the annuity and guaranteeing the continuation of the annuity for the first three years of the HECM. The Mortgagee must also obtain a bank statement or a transaction history from a bank evidencing receipt of the annuity. (c) Calculation of Effective Income The Mortgagee must use the current rate of the annuity to calculate Effective Income. The Mortgagee must subtract any of the assets used for the Borrower’s required funds to close to purchase the subject Property from the Borrower’s liquid assets prior to calculating any Annuity Income. (13) Notes Receivable Income (a) Definition Notes Receivable Income refers to income received by the Borrower as payee or holder in due course of a promissory Note or similar credit instrument. (b) Required Documentation The Mortgagee must verify and document the existence of the Note. The Mortgagee must also verify and document that payments have been consistently received for the previous 12 months by obtaining Tax Returns, deposit slips or canceled checks and that such payments are guaranteed to continue for the first three years of the HECM. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 665 Last Revised: 11/26/2025 (c) Calculation of Effective Income For Borrowers who have been and will be receiving a consistent amount of Notes Receivable Income, the Mortgagee must use the current rate of income to calculate Effective Income. For Borrowers whose Notes Receivable Income fluctuates, the Mortgagee must use the average of the Notes Receivable Income received over the previous year to calculate Effective Income. (14) Nontaxable Income (a) Definition Nontaxable Income refers to types of income not subject to federal taxes, which includes, but is not limited to: • some portion of Social Security Income; • some federal government employee Retirement Income; • Railroad Retirement benefits; • some state government Retirement Income; • certain types of disability and Public Assistance payments; • Child Support; • Section 8 Housing Choice Vouchers; • military allowances; and • other income that is documented as being exempt from federal income taxes. (b) Required Documentation The Mortgagee must document and support the amount of income from nontaxable sources. (c) Calculation of Effective Income Mortgagees may add the amount of Nontaxable Income to Effective Income. However, because the Residual Income analysis will take into account federal taxes, it will be reflected in the expense analysis for Residual Income. Nontaxable Income, therefore, may not be “Grossed Up.” The Mortgagee may not make any additional adjustments or allowances based on the number of the Borrower’s dependents. (15) Government Assistance Non-Cash Benefits Income (a) Definition Government Assistance Non-Cash Benefits Income refers to non-cash benefits being received by the Borrower through federal, state, or local government II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 666 Last Revised: 11/26/2025 programs, e.g., Supplemental Nutrition Assistance Program (SNAP), energy assistance, etc. (b) Required Documentation In determining whether such benefits may be counted as income, the Mortgagee must: • verify that the benefits are being received at the time of loan application, or that an award letter has been issued, and benefits will begin to be received within 60 Days. Mortgagees may not count benefits for which the Borrower is potentially eligible and intends to apply; • verify that the benefits are not subject to any stated termination date other than one related to the death of the Borrower or the sale of the Property; and • verify that approval of the HECM will not jeopardize continued eligibility for the benefits, e.g., HECM proceeds would trigger disqualification based on program income or asset requirements. (c) Calculation of Effective Income Mortgagees may add the amount of the monthly non-cash benefits to Effective Income. (16) Foster Care Payment (a) Definition Foster Care Payment refers to payment received from a state- or county- sponsored organization for providing temporary care for one or more individuals. (b) Standard Foster care payment may be considered acceptable and stable income if the Borrower has a two-year history of providing foster care services and receiving foster care payment and that the foster care payment is reasonably likely to continue. (c) Required Documentation The Mortgagee must obtain a written verification of foster care payment from the organization providing it, verify and document that the Borrower has a two-year history of providing foster care services and receiving foster care payment, and that the foster care payment is reasonably likely to continue. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 667 Last Revised: 11/26/2025 (d) Calculation of Effective Income The Mortgagee must calculate foster care payment by using the lesser of: • average foster care payment received over the previous two years; or • average foster care payment received over the previous year. (17) Foreign Income (a) Definition Foreign Income refers to income received by a Borrower from sources located outside of the United States by a foreign corporation or a foreign government and is paid in foreign currency. (b) Standard The Mortgagee may use Foreign Income as Effective Income if the Borrower has received this income for the previous two years and it is reasonably likely to continue. (c) Required Documentation The Mortgagee must obtain complete individual Tax Returns showing Foreign Income for the most recent two years, including all schedules. For all Foreign Income, the Mortgagee must satisfy the requirements listed based on source and type of income as outlined in Effective Income Analysis. If the Foreign Income documents are not received in English, the Mortgagee must provide a complete and accurate translation for each document and convert foreign currency to U.S. dollars. (d) Calculation of Effective Income The Mortgagee must analyze the Borrower’s Tax Returns to determine gross Foreign Income. The Mortgagee must average the Foreign Income over the previous two years to calculate Effective Income. (18) Imputed Income from Asset Dissipation (a) Definitions Imputed Income from Asset Dissipation refers to the amount of monthly income that could be generated if liquid assets were dissipated and converted to cash. Liquid Assets refers to assets that can be converted to cash within one year without payment of an IRS penalty. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 668 Last Revised: 11/26/2025 (b) Required Documentation Mortgagees must document the source of the asset in accordance with Asset Requirements. Mortgagees may not count the same asset twice, i.e., as a source of interest or other income and as imputed income from the dissipation of the asset. The Mortgagee must also subtract any funds from the Borrower’s liquid assets that the Borrower is required to bring to closing prior to calculating any imputed income from asset dissipation. If the asset is jointly held with any other party not obligated on the Mortgage, the asset may be counted provided that the Borrower provides documentation that the Borrower has unrestricted access to that asset. (c) Calculation of Effective Income Mortgagees must calculate the combined value of assets and calculate income from these sources by: • calculating the value of the assets by reducing any taxable assets by the lesser of the Borrower’s actual tax rate based on Tax Returns from the prior tax year or 15 percent. No adjustment is required if the Borrower does not have a federal tax obligation; and • dividing the total value by the remaining life expectancy of the youngest Borrower (in months) from the loan period to the Assumed Loan Periods for Computations of Total Annual Loan Cost Rates. If the youngest Borrower’s next birthday is less than 183 Days after the estimated date of closing, round up the age to the nearest whole year.

Source: FHA Single Family Housing Policy Handbook 4000.1, Part II — e. Effective Income Analysis (04/10/2025) · source URL · snapshot 8c03836f77f317e1