Capacity to Repay

When an FHA underwriter cites Capacity to repay, he or she is referring to a borrower’s anticipated amount of income and the likelihood that it will continue. As such,  FHA Loan guidelinescall for the evaluation of the source of a borrower’s income to ensure that it can be verified, that it is stable and that it has a high likelihood to continue.

Income Stability:  FHA loan requirements do not put restrictions on the type of employment that a borrower has or on minimum length of time that they have held a position of employment. However, FHA first time home buyer loan, FHA purchase loan, FHA refinance loan or FHA loan or  FHA loans do require that a borrower has at least two years of employment history. FHA guidelines allow that a borrower’s previous school or military experience satisfies the two year employment history requirement.

Regarding employment history, there are certain circumstances worth mentioning that may or may not preclude a borrower from qualifying for an FHA first time home buyer loan, FHA purchase loan,  FHA refinance loan or FHA loan or FHA loans. As such, when these circumstances are present, written explanatory documentation is required.

Employment Gaps: Employment gaps that are longer than a month must be explained in writing

Frequent Job Changes: It is acceptable that a borrower frequently changes jobs in the same line of work as long as he or she continues to advance in income or benefits. In these circumstances, income stability takes priority to job stability.

Recent Return to Work Force: If a borrower has recently returned to the work force after an extended absence, there income can be considered effective and stable if the borrower has been employed for six months or more and he or she can document a two-year history prior to the absence from the work force.