Does FHA Allow Per Diem Income to Qualify?

An FHA loan is a mortgage insured by the Federal Housing Administration, designed to make homeownership more accessible, especially for first-time buyers or those with lower credit scores. These government-backed loans offer flexible credit and down payment requirements compared to conventional loans. Per diem income is a daily allowance provided by an employer to cover living expenses incurred while traveling for business, such as meals, lodging, and incidental costs. While frequently tax-free for the employee when within federal limits and properly accounted for, per diem payments are typically meant to reimburse expenses rather than serve as regular wages.

FHA Loan Income Qualification Standards

FHA lenders evaluate income based on its stability, reliability, and likelihood of continuing for at least three years. All income sources must be verifiable through official documentation to confirm their legitimacy. Lenders typically require a two-year history of receiving income to demonstrate its consistency.

The FHA primarily considers gross income before deductions when determining eligibility. This includes regular wages, overtime, bonuses, and commissions, provided they are stable and consistent. Income is a primary factor in calculating debt-to-income (DTI) ratios, which are essential for loan qualification. The FHA generally allows a maximum front-end DTI ratio (housing costs) of 31% and a back-end DTI ratio (housing costs plus other recurring debts) of 43%. However, these guidelines can be flexible, with exceptions for higher ratios, potentially up to 50% or even 56.9% with compensating factors like strong credit or significant cash reserves.

Specific FHA Guidelines for Per Diem Income

Per diem income can be considered for FHA loan qualification, but only under specific conditions. Lenders generally view per diem as reimbursement for expenses rather than regular wages. For it to be counted, the per diem must be consistent, recurring, and clearly expected to continue for at least three years. Sporadic or temporary per diem payments are not included as qualifying income.

Employer verification must confirm that the per diem is a regular part of compensation and is highly likely to continue. The FHA focuses on the portion of per diem that genuinely represents income beyond documented expenses. If the per diem is solely for covering business expenses, it is not considered qualifying income.

While often non-taxable for employees, the FHA scrutinizes the stability and recurrence of per diem payments. The distinction between recurring per diem that can be considered income and one-off expense reimbursements is important. Only the portion that consistently exceeds actual documented expenses and is treated as taxable income by the employer can potentially be included.

Documenting Per Diem Income for FHA

Borrowers seeking to include per diem income for FHA qualification must provide specific documentation. This often includes pay stubs that clearly show the per diem payments as part of year-to-date earnings. Additionally, W-2 forms and tax returns are generally required to demonstrate that these amounts have been reported as taxable income. If the per diem is not included on W-2s as taxable income, it is generally treated as an expense reimbursement and excluded from income calculations.

An employment verification letter from the employer is required. This letter should detail the per diem amount, its frequency, and explicitly state that its continuation is expected. Lenders also require proof of a consistent per diem income history, typically over at least two years. This historical data can be substantiated through employment records, detailed pay stubs, or tax forms.

If any portion of the per diem is intended to cover expenses, borrowers may need to demonstrate how much of it is “excess” and thus available as income. This involves showing that the per diem consistently exceeds actual, documented business expenses.

Calculating Per Diem Income for FHA Qualification

Lenders use a specific methodology to determine the qualifying amount of per diem income for an FHA loan. The process typically involves averaging the per diem income received over the past 12 or 24 months. This averaging helps establish a consistent monthly figure that reflects the borrower’s regular earning capacity from this source.

A significant part of this calculation involves distinguishing between per diem as income and per diem as expense reimbursement. The portion of per diem intended for legitimate business expenses, such as lodging or meals while traveling, is typically excluded from qualifying income. Only the “net” or “excess” portion—the amount remaining after actual expenses are covered—is considered. This excess amount must be demonstrably consistent and treated as taxable income by the employer.

While FHA sets overarching guidelines, individual lenders may have slightly varying internal policies regarding the precise calculation and verification of per diem income, particularly concerning the expense portion. The calculated per diem amount, once determined to be stable and effective, is then added to the borrower’s other qualifying income sources. This total qualifying income is then used to compute the debt-to-income ratios, which are fundamental in assessing the borrower’s capacity to manage the mortgage payment.