Some house hunters have questions about the ability to be approved for an FHA mortgage using military benefits as qualifying income. What will a participating FHA lender consider and what will they reject? Much depends on the nature of the benefit and whether it is likely to continue.
Why would currently serving military members or military veterans consider an FHA loan instead of using their zero-down VA home loan benefit?
There are several reasons why the FHA loan might be a choice these buyers make–some might want to save their VA loan for a bigger home, or they may have already used their VA loan entitlement in an earlier purchase.
To qualify for any home loan you need verifiable income. Military income is not a lump sum payment for services rendered. Instead, there is basic pay, military allowances, and benefits from agencies like the Veterans Administration.
HUD 4000.1 has a definition for military pay that ends the ambiguity about the basic pay, benefits, and allowances allowed to be included in the debt to income ratio once verified by the lender:”
“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.”
Note the VERY important last line there–you cannot use military education benefits including the housing stipend provided by some versions of the GI Bill.
The reason? Those benefits have a definite expiration and a limited number of payments and therefore do not meet the FHA requirements for being likely to continue.
How is the income listed above (excluding education benefits, which we already know can’t be counted) to be verified by the lender? HUD 4000.1 explains the required documentation the lender must gather for military pay:
“Borrowers 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 Mortgage, Military Income may only be considered Effective Income if the Borrower represents their intent to continue military service.”
Furthermore:
“The Mortgagee must use the current amount of Military Income received to calculate Effective Income.” A lender may want to know if the borrower has an upcoming promotion that could affect the amount of income within a certain time frame from loan closing–be sure to let your loan officer know if your current income is due to change, how soon, and by how much.
Having the lender verify your military income isn’t that much different than verifying civilian income for an FHA mortgage loan, but you may need to help your loan officer navigate the proper channels for getting the verification done.
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