Effective May 19, 2025, changes have been implemented to how variable income is calculated within our system. These updates are the result of valuable client feedback following our March 2025 release, which brought FHA and VA income calculations more in line with those used for conforming loans. After a thorough analysis, we’ve refined the way certain income types are handled to better align with FHA Handbook 4000.1 guidelines.
Overview of the Changes
The recent updates enhance our calculators to help ensure compliance with agency requirements and reduce the risk of income-related errors. The revised calculations apply to a range of variable income types, including:
- Base pay
- Overtime
- Commissions
- Tips
- Bonuses
- Shift premiums and other variable compensation
Two key concepts were central to our review: Minimum History and the Definition of the Previous Two Years.
Minimum History Requirement
According to Section II.A.5.b of FHA Handbook 4000.1, a borrower must have received the variable income for at least the past two years and it must be reasonably likely to continue. This is a qualification requirement, not a calculation method.
However, an exception is outlined in the same section: if the income has been consistently earned for a period of at least one year, and is reasonably likely to continue, it may still be considered.
Defining “Previous Two Years”
FHA defines the “previous two years” as the two most recent calendar years, not simply the 24 months preceding the pay stub. For income calculations in 2025, this means we’re reviewing income earned in 2024 and 2023 in full.
If a borrower has not been employed for a full two years—say they started in mid-2023—we would average income from half of 2023 and all of 2024, following guideline provisions. From there, we select the lowest qualifying income for the final determination.
Variations Between Loan Types
It’s important to note that while conforming, FHA, VA, and USDA loans often have overlapping criteria, each agency interprets variable income differently:
- FHA: Offers the clearest guidance, which we now follow closely.
- VA: Offers less precise calculation guidelines; we apply FHA standards in these cases.
- USDA: Tends to mirror conforming loan practices but with shorter documentation windows and slightly more lenient thresholds.
Given the variability in agency standards, our best practice is to default to FHA methodology when VA or USDA guidelines lack clarity. This ensures consistency and defensibility in income qualification.
These updates are designed to improve calculation accuracy and reduce risk in variable income evaluations. If you have any questions or would like to see how these changes apply within your scenarios, please contact our support team.
Thank you for your continued feedback and partnership.