FHA Single Family Housing Policy Handbook 4000.1, Part II — f. Residual Income Analysis (04/29/2024)

FHA Single Family Housing Policy Handbook 4000.1, Part II — f. Residual Income Analysis (04/29/2024)

f. Residual Income Analysis (04/29/2024) i. Definition Residual Income refers to the total monthly Effective Income from all sources described in Effective Income Analysis for the Borrowers obligated on the Mortgage, minus the total monthly expenses from all sources described in Monthly Expense Analysis for the Borrowers obligated on the Mortgage. ii. Standard The Borrower must have Residual Income at least equal to the applicable amount for the Borrower’s family size and geographic region on the Table of Residual Incomes by Region. Where a Borrower’s Residual Income is less than the applicable standard, see the Residual Income Shortfall section. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 669 Last Revised: 11/26/2025 (A) Calculating Family Size Count all members of the household, without regard to the nature of the relationship, when determining family size, including an Eligible NBS and Other Non-Borrowing Household Members. (1) Reducing Family Size An Eligible NBS or Other Non-Borrowing Household Member may be eliminated from family size provided that: • they authorize the Mortgagee to collect information on their Effective Income and Monthly Expenses; • they provide consent to the Mortgagee to verify their SSN and obtain tax verification forms; • the Mortgagee meets the requirements associated with the Privacy Act; and • the excluded household members’ Residual Income meets the standard for a one-person family size. (2) Limitations on the Use of the One-Person Family Size The one-person family size may only be used for a Borrower where: • the RLARM indicates that the Borrower is single or unmarried; • for Borrowers required to file Tax Returns: • the results of an IRS Form 4506-C, or verification or copies of Tax Returns confirm that the Borrower files as a single person; or • for Borrowers not required to file Tax Returns: • the property title, credit report, or other information supports the marital status claimed by the Borrower; and • the Borrower identifies as unmarried in the certification regarding marital status. This documentation is not required where the Eligible NBS or Other Non- Borrowing Household Member has been excluded from family size based on the criteria defined in this section. (3) Residual Income of Eligible Non-Borrowing Spouse Used as Compensating Factor If income from an Eligible NBS is cited as a Compensating Factor, the Mortgagee may not eliminate the Eligible NBS when calculating family size. See Reducing Family Size. Where income from an Eligible NBS will be used as a Compensating Factor or to reduce family size, the Eligible NBS must also be required to sign the appropriate IRS form to obtain Tax Returns directly from the IRS. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 670 Last Revised: 11/26/2025 (B) Required Documentation To reduce family size, the Residual Income for the Eligible NBS or Other Non- Borrowing Household Member must meet the same documentation and verification standards as required for the Borrower’s Effective Income Analysis, Monthly Expense Analysis, and Residual Income analysis. Imputed income from asset dissipation may not be included. iii. Table of Residual Incomes by Region To determine the Residual Income standard, Mortgagees must select the applicable family size and region from the table below. Table of Residual Incomes by Region Family Size Northeast Midwest South West 1 $540 $529 $529 $589 2 $906 $886 $886 $998 3 $946 $927 $927 $1,031 4 or more $1,066 $1,041 $1,041 $1,160 The regions on the Table of Residual Incomes by Region include the following states: Region States Northeast CT, MA, ME, NH, NJ, NY, PA, RI, VT Midwest IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI South AL, AR, DC, DE, FL, GA, KY, LA, MD, MS, NC, OK, PR, SC, TN, TX, VA, VI, WV West AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY iv. Residual Income Shortfall Where a Borrower’s Residual Income is less than the applicable standard, the underwriter must document that the Borrower satisfies one of the criteria below. The Borrower: • effectively meets the applicable Residual Income standard with the use of one or more acceptable Income Compensating Factors; or • meets the standard for citing one or more Non-income Compensating Factors. If the Borrower does not meet the criteria above, then the Mortgagee must require a Partially Funded LESA. Extenuating Circumstances may not be used to compensate for a Residual Income shortfall. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 671 Last Revised: 11/26/2025 v. Acceptable Compensating Factors (A) Definitions Compensating Factors refer to factors that may be used to justify approval of HECMs where the Borrower does not meet the Residual Income standard. Income Compensating Factors refer to income from the following sources: (1) Overtime, Bonus, or Tip Income or Seasonal and Part-Time Employment; (2) Eligible NBS income; (3) expected SSI or pension income; and (4) imputed income from the HECM. Non-income Compensating Factors refer to other Borrower financial characteristics and include the following: (1) property charge payment history, (2) access to other credit, (3) assets equal to Projected Life Expectancy Property Charges, and (4) HECM sufficient to pay off debts. (B) Standard When citing a Compensating Factor, the Mortgagee must document the applicable requirements below. (1) Income Compensating Factors Mortgagees may combine one or more income Compensating Factors. To use income Compensating Factors, the Mortgagee must verify the cited income Compensating Factor(s) will result in the Borrower effectively meeting the Residual Income standard. If applicable, the Mortgagee must take into consideration the impact of a Fully Funded LESA that may effectively reduce the Borrower’s monthly expenses when determining whether the Borrower will effectively meet the Residual Income standard. Mortgagees may not use income Compensating Factors to reach 80 percent or more of the Residual Income standard in order to cite non-income Compensating Factors. (a) Overtime, Seasonal, Part-Time, Bonus, or Tip Income To cite Overtime, Bonus, or Tip Income, or Part-Time or Seasonal Employment that is not reflected in Effective Income as a Compensating Factor, the Mortgagee must verify and document that the Borrower has received this income for at least six months, and it will likely continue. Overtime, Bonus, or Tip Income, or Part-Time or Seasonal Employment from an Eligible NBS may not be used for this Compensating Factor. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 672 Last Revised: 11/26/2025 (b) Eligible Non-Borrowing Spouse Income To cite income from an Eligible NBS that is not reflected in Effective Income as a Compensating Factor, the Mortgagee must: • verify and obtain the Eligible NBS’ signature on the appropriate IRS form to obtain Tax Returns directly from the IRS; and • verify and document that the Eligible NBS has received this income for at least six months, and it will likely continue. (c) Expected SSI or Pension Income To cite income from Expected SSI or Pension that is not reflected in Effective Income as a Compensating Factor, the Mortgagee must verify and document that the Borrower has received an award letter stating that the Borrower will begin receiving Pension or SSI within the next 12 months. (d) Imputed Income from HECM To cite Imputed Income from a HECM that is not reflected in Effective Income as a Compensating Factor, the Mortgagee must verify and document the additional income that would result from dissipating available HECM proceeds remaining after closing, based on the original Principal Limit less any required Repair Set-Aside, LESA, Servicing Fee Set-Aside, and Disbursements for Mandatory Obligations. (2) Non-income Compensating Factors To cite non-income Compensating Factors, the Mortgagee must determine that the Borrower’s Residual Income is 80 percent or more of the applicable Residual Income standard and document that the specific criteria described for the individual Compensating Factor have been met. (a) Property Charge Payment History To cite property charge payment history as a Compensating Factor, the Mortgagee must determine that: • the Borrower has paid their own Property Charges directly for at least the last 24 months (i.e., the Property Charges were not paid by a Mortgagee from an escrow account or by another party) and meets the standard in Satisfactory Property Charge Payment History; • the Borrower has made all property charge payments without incurring penalties during the last 24 months; and • the Borrower’s current income is not less than the income during the previous 24 months. II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT B. Title II Insured Housing Programs Reverse Mortgages 5. Performing the Financial Assessment of the Borrower Handbook 4000.1 673 Last Revised: 11/26/2025 (b) Access to Other Credit To cite access to other credit as a Compensating Factor, the Mortgagee must determine that: • the Borrower’s housing payment for the Property to secure the HECM is the only open account with an outstanding balance that is not paid off monthly; • the credit report shows established credit lines in the Borrower’s name open for at least six months; and • the Borrower has paid off all these accounts and credit lines in full monthly for at least the past six months. Borrowers who have no established credit other than their housing payment, who have no other credit lines in their own name open for at least six months, or who cannot document that all other accounts are paid off in full monthly for at least the past six months do not qualify under these criteria. Credit lines not in the Borrower’s name but for which they are an authorized user do not qualify under these criteria. (c) Assets Equal to Life Expectancy Property Charges To cite assets equal to life expectancy property charges as a Compensating Factor, the Mortgagee must determine that the Borrower has assets (excluding HECM proceeds) equivalent to the Projected Life Expectancy Property Charges that were not dissipated or considered in the Residual Income calculation. (d) HECM Sufficient to Pay Off Debts To cite HECM sufficient to pay off debts as a Compensating Factor, the Mortgagee must determine that HECM proceeds remaining after closing (based on the original Principal Limit less any required Repair Set-Aside, LESA, Servicing Fee Set-Aside, and Disbursements for Mandatory Obligations) that were not dissipated and counted as income are sufficient to pay off revolving and installment debt, including revolving and installment accounts in collection, that would reduce monthly payments to the extent that Residual Income would meet the Residual Income standard.

Source: FHA Single Family Housing Policy Handbook 4000.1, Part II — f. Residual Income Analysis (04/29/2024) · source URL · snapshot 8c03836f77f317e1