In Mortgagee Letter 2022-09 dated July 7, 2022, the U.S. Department of Housing and Urban Development (HUD) sets forth new flexibility in underwriting guidelines for calculating effective income for Federal Housing Administration (FHA) insured loan applicants who incurred a reduction or loss in income as a result of a COVID-19 Economic Event.  The guidance in the Mortgagee Letter is effective for Title II single family forward mortgage loans with case numbers assigned on or after September 5, 2022, although lenders may begin using the policies announced in the Mortgagee Letter immediately.  HUD will accept feedback on the Mortgagee Letter for 30 days from the date of the letter.

The Mortgagee Letter addresses both the underwriting of loans with the Technology Open To Approved Lenders (TOTAL) Mortgage Scorecard, and manual underwriting.  For purposes of both types of underwriting, a COVID-19 Related Economic Event refers to a temporary loss of employment, temporary reduction of income, or temporary reduction of hours worked during the Presidentially-Declared COVID-19 National Emergency.  Guidance is provided on the following aspects of FHA underwriting guidelines:

•     Primary Employment

•     Part-Time Employment

•     Overtime, Bonus or Tip Income

•     Employed by Family-Owned Business

•     Commission Income

•     Self-Employment Income

•     Additional Required Analysis of Stability of Employment Income

We address certain portions of the guidance below.

Primary Employment

Calculation of Effective Income—TOTAL and Manual

Salary—Standard.  For employees who are salaried and whose income has been and will likely be consistently earned, the lender must use the current salary to calculate Effective Income.

Salary—Exception Due to COVID-19 Related Economic Event.  For employees who are salaried and whose current income will likely be consistently earned, the lender must use the current salary to calculate Effective Income.

Hourly—Standard.  For employees who are paid hourly and whose hours do not vary, the lender must consider the borrower’s current hourly rate to calculate Effective Income.

For employees who are paid hourly and whose hours vary, the lender must use the average of the income over the previous two years. If the lender can document an increase in pay rate the lender may use the most recent 12-month average of hours at the current pay rate.

Hourly—Exception Due to COVID-19 Related Economic Event.  For employees who are paid hourly and whose hours do not vary, the lender must use the current hourly rate to calculate Effective Income.

For employees who are paid hourly and whose hours vary, the lender must calculate the Effective Income by using the lesser of:

•     The average of the income in accordance with the standard guidance for the time period    prior to the COVID-19 Related Economic Event; or

•     The average of the income earned since the COVID-19 Related Economic Event.

Part Time Employment

Calculation of Effective Income—TOTAL and Manual

Standard.  The lender must average the income over the previous two years. If the lender can document an increase in pay rate the lender may use a 12-month average of hours at the current pay rate.

Exception Due to COVID-19 Related Economic Event.  For employees who are paid hourly and whose hours do not vary, the lender must use the current hourly rate to calculate Effective Income.

For employees who are paid hourly and whose hours vary, the lender must calculate the Effective Income by using the lesser of:

•     The average of the income in accordance with the standard guidance for the time period prior to the COVID-19 Related Economic Event; or

•     The average of income earned since the COVID-19 Related Economic Event.

Overtime, Bonus or Tip Income

Calculation of Effective Income—TOTAL and Manual

Standard.  For employees with Overtime, Bonus or Tip Income, the lender 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.

Exception Due to COVID-19 Related Economic Event.  For employees with Overtime, Bonus or Tip Income, the lender must calculate the Effective Income by using the lesser of:

•     The average of the income in accordance with the standard guidance for the time period prior to the COVID-19 Related Economic Event; or

•     The average Overtime, Bonus or Tip Income earned since the COVID-19 Related Economic Event.

Commission Income

Calculation of Effective Income—TOTAL and Manual

Standard.  The lender must calculate Effective Income for commission by using the lesser of:

•     Either, (i) the average Commission Income earned over the previous two years for Commission Income earned for two years or more, or (ii) the length of time Commission Income has been earned if less than two* years; or

•     The average Commission Income earned over the previous year

*In the TOTAL guidance the reference to “two” does not appear, apparently in error.

Exception Due to COVID-19 Related Economic Event.  For employees with Commission Income, the lender must calculate the Effective Income by using the lesser of:

•     The average of the income in accordance with the standard guidance for the time period prior to the COVID-19 Related Economic Event; or

•     The average of the Commission Income earned* since the COVID-19 Related Economic Event.

*In the Manual guidance the reference to “earned” does not appear, apparently in error.

Self-Employment Income

In addition to the guidance provided below, the Mortgagee Letter addresses standard guidance, and guidance regarding exceptions due to a COVID-19 Related Economic Event, for the ability to consider self-employment income, required documentation, and an additional required analysis of stability of employment income.

Calculation of Effective Income—TOTAL and Manual

Standard.  The lender 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 (Appendix 2.0) to HUD Handbook 4000.1.)

The lender must calculate gross Self-Employment Income by using the lesser of:

•     The average gross Self-Employment Income earned over the previous two years; or

•     The average gross Self-Employment Income earned over the previous one year.

Exception Due to COVID-19 Related Economic Event.  For self-employed borrowers with a COVID-19 Related Economic Event that have since regained income at a level greater than or equal to 80 percent of their income prior to COVID-19 Related Economic Event for a minimum of six months, the lender must calculate gross Self-Employment Income by using the lesser of:

•     The average gross Self-Employment Income earned over the previous two years prior to the COVID-19 Related Economic Event; or

•     The average gross Self-Employment Income earned over the previous six months after the COVID-19 Related Economic Event.