The Quick Read: Which papers you hand over depends on how you earn your money. A salaried borrower brings pay records and W-2s. A self-employed borrower brings traditional personal-income documentation and business financials. A retiree brings award letters and bank statements showing the deposits. Across the wholesale programs Lendmire places FHA files with, cash-out is documented more heavily than a streamline, because the new loan reaches up to 80% of the home’s appraised value.
Key Takeaways
- Income must be legal, documented, verified and likely to continue. Your word alone never counts.
- Each income type has its own paper trail and its own averaging method.
- Self-employed borrowers qualify on tax-return income, not on bank deposits.
- Rental income from a room or accessory unit is capped as a share of your total income.
- Your home must have been owned and occupied for 12 months before the case number.
The first rule of an FHA cash-out is that the home is your primary residence, owned and lived in for 12 months before the case number is assigned. The second rule is that your income has to carry the new, larger loan. Equity opens the door. Documented income decides whether you walk through it.
This page walks through the paperwork by borrower type. Lendmire’s FHA cash-out refinance program page covers the loan itself. Program figures here are subject to lender guidelines and full file review, and nothing below is a commitment to lend.
What Does an FHA Cash-Out Underwriter Actually Check?
Underwriters ask four questions: Is the income real, is it documented, will it continue, and does the new payment fit? Everything you submit answers one of those.
The envelope is simple. Maximum financing on a cash-out is 80% of the appraised value. Ratios run from a base pair of 31/43 (housing to total debt) up to 40/50 when documented compensating factors support it, and the automated finding governs most files. Mortgage insurance applies: an upfront premium of 1.75% of the base loan, financed, plus an annual premium that depends on term, amount and LTV.
HUD’s Housing Handbooks index lists the current version of the rulebook lenders follow. The leverage cap itself dates to HUD’s 2019 announcement, which lowered cash-out from 85% to 80% to align FHA with the maximum that conventional loans allow. Older articles quoting 85% or 95% are out of date.
Which Documents Does Every Borrower Provide?
Every borrower provides identification, a credit authorization, proof of ownership and occupancy, and 12 months of mortgage payment history. Income papers come on top of that.
| Baseline item | What it proves |
|---|---|
| Ownership and occupancy records | You lived there 12 months |
| Mortgage payment history | On-time payments for 12 months |
| Credit report | Debts and credit behavior |
| Appraisal | Value, which sets the loan ceiling |
| Income papers (by type, below) | Ability to repay |
Occupancy is often shown with utility bills or employment records at the address. Payment history usually comes straight from the credit report. If the mortgage is not on the report or is not in your name, HUD’s Mortgagee Letter 2020-30 calls for a verification of mortgage, bank statements or similar proof that every payment was made in the month due.
Here’s the catch. A missing document rarely gets a flat denial. It stalls the file while someone chases it.
Documents by Borrower Type
Here is the quick matrix. Details follow.
| Income source | Typical documents | Key underwriting test |
|---|---|---|
| Salaried / hourly | Pay stub, W-2s, employment verification | Current pay or two-year average |
| Overtime, bonus, tips | Pay history, W-2s | Two-year history, likely to continue |
| Self-employed | Traditional personal-income documentation, business financials | Net income after deductions |
| Retired / fixed benefit | Award letter, bank statements | Amount received, continuance |
| Rental (ADU, boarders) | Schedule E, lease, deposits | Capped share of total income |
Salaried and hourly workers
If you work fixed hours at a set rate, the lender uses your current pay. A recent pay stub with year-to-date earnings, W-2s and a verbal verification of employment are the usual package.
Hours that vary change the method. Under HUD’s Mortgagee Letter 2022-09, the lender averages income over the previous two years. If you documented a pay raise, it may use the most recent 12-month average of hours at the current rate.
Overtime, bonus and tips
Extra pay counts when you have received it for two years and it is reasonably likely to continue. Less than two years can work if it was earned consistently for at least one year. The standard calculation uses the lesser of the two-year average (or the shorter period earned) and the one-year average. So a banner year does not set your qualifying income. The conservative number does.
That same letter contains temporary flexibility tied to a past emergency. It is not the everyday rule.
Self-employed borrowers
This is where files get heavy. Expect traditional personal-income documentation, plus business returns or financials when the lender needs them. A year-to-date profit-and-loss statement and balance sheet come into play when a long gap has passed since your last return. Lenders may also pull transcripts directly from the IRS using a signed request form.
Two facts matter most. First, qualifying income is what your return shows after deductions. Heavy write-offs lower it. Second, bank statements verify assets. They are not a substitute for tax-return income.
Picture a borrower whose business grosses well but whose returns show aggressive deductions. The underwriter works from the net figure on the return. The deductions that saved tax last April now shrink the loan this year. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
If your income is falling, expect closer review. Many files with a meaningful year-over-year decline get downgraded to manual underwriting. Lenders also generally want income that has been steady, so a short or new self-employment history needs extra explanation.
Retired and fixed-benefit borrowers
For pension income, lenders typically want the pension letter, the most recent bank statement showing receipt, or traditional income documentation, and they use the amount currently received. Social Security works similarly, with an award letter.
The question underneath is continuance. Income that is set to end soon generally cannot count. Some benefits are taxable and some are not, and the lender may adjust non-taxable income upward in its calculation. The exact adjustment is a lender-level detail. For comparison, conventional loans have their own rule, laid out in Fannie Mae’s Social Security income guidance.
Rental income from your own home
Because the home must be your primary residence, rent from it is a supplement only. HUD’s Mortgagee Letter 2023-17 covers accessory dwelling units and two- to four-unit homes. ADU rent may not exceed 30% of your total monthly effective income. With a history, the lender averages your Schedule E. With little or no history, it asks for a lease of at least one year after closing plus proof of a deposit or first month’s rent.
Boarder income follows a similar 30% cap under Mortgagee Letter 2025-04. Documentation includes 12 months of history, receipt in at least nine of the last 12 months, proof the boarder shares your address, and a written agreement.
Renting a room does not turn your home into an investment property. Occupancy decides the leverage.
Couples and mixed-income households
Each person’s income is documented by its own type. A salaried spouse and a self-employed spouse mean two paper trails. Under the CFPB’s compliance guide, a lender need not verify every applicant’s income unless all of it is needed to qualify. So a second income you do not need can stay out of the file. A second income you do need must be fully documented.
What Income Does Not Count?
Income that cannot be documented, that is not legally derived, or that will not continue does not count. Cash you never reported, deposits that appear only on bank statements, and benefits expiring soon all fall here. In manual underwriting, such funds may still help as a compensating factor, but they do not become qualifying income.
The CFPB’s ability-to-repay rule sits underneath all of this. It requires lenders to use reasonably reliable third-party records, such as W-2s or payroll statements. Income does not have to be full-time or salaried to count. It does have to be provable.
How Do Underwriters Turn Papers Into a Number?
They average, discount and divide. Take an hourly worker with varying hours: the lender averages two years of earnings, not the best month. Take a self-employed borrower: it starts from net business income on the returns, adds back only what the guidelines allow, and ends with a monthly figure.
Your housing payment, including mortgage insurance, is then compared with that income, along with your other debts. The ratio test runs from the 31/43 base up to 40/50 with documented compensating factors such as reserves or strong credit. The automated finding governs most files. If the system returns a “Refer” result, a human underwriter reviews it manually, and a recent late payment on the mortgage can force exactly that.
Edge Cases Where the Rule Bends
- Inherited home. The 12-month wait is generally waived for an heir, but renting the home after inheritance restarts it.
- Recent forbearance. A 2020 HUD mortgagee letter requires 12 consecutive payments after completing the plan on a cash-out, stricter than the shorter window for other loans.
- Existing FHA loan. A true cash-out needs a full appraisal and the 80% cap. The FHA Streamline refinances an existing FHA loan without an appraisal or cash, with a limited credit review.
- Non-occupant co-borrower. Rules vary by lender on cash-out, so ask before assuming one can join.
- Special land programs. Hawaiian Home Lands loans are excluded from the 80% cap.
For a comparison to another path, Lendmire’s article Conventional Cash-Out Refinance Documentation for Every Income Type shows how those rules differ.
Why Files Stall, and a Pre-Application Checklist
Most stalls come from five things: stale pay stubs, a missing tax year, an unexplained employment gap, a mortgage payment history that is not on the credit report, and a business statement that does not match the return. Gather these before applying:
- Two years of conventional personal-income paperwork, matched to your income type
- A current pay stub or benefit letter
- Twelve months of mortgage payment proof
- Utility bills or similar proof of occupancy
- A short letter explaining any job gap or income dip
Some lenders also set stricter overlays than HUD does, such as a higher credit floor. Ask which apply before you pay for an appraisal.
What If Your Income Does Not Support the Loan?
Three honest options remain. You can borrow less. You can wait until a full tax year shows higher income. Or you can keep your current loan. The 80% cap leaves about 20% equity, and the new loan replaces the whole first mortgage with a larger balance, with FHA mortgage insurance on all of it. If that tradeoff does not pencil, keeping what you have may be the right call.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
Key Terms Defined
Effective income: The monthly income a lender is willing to count after verifying it and testing whether it will continue.
Continuance: The expectation that an income source will keep arriving for a meaningful period ahead.
Manual underwriting: A human review used when the automated system does not approve the file outright.
Compensating factor: A documented strength, such as reserves or strong credit, that supports higher ratios.
Streamline refinance: An FHA-to-FHA refinance with limited credit review and no appraisal, and no cash out.
Frequently Asked Questions
Can I use bank statements to prove self-employed income on an FHA cash-out?
No, not as a substitute for standard personal-income documentation. Bank statements verify assets and deposits. Qualifying income for a self-employed borrower comes from the returns, after deductions.
How much overtime or bonus income counts?
Usually the lower of your two-year average and your one-year average, provided you have two years of history and it is likely to continue. Under two years can work if it was earned consistently for at least one year.
Does rent from a room or ADU help me qualify?
Yes, within limits. ADU and boarder income each may not exceed 30% of total monthly effective income. The documents differ: Schedule E or a lease for an ADU, and a written agreement plus nine of 12 months of receipts for boarders.
What if my mortgage does not appear on my credit report?
The lender needs a verification of mortgage or bank statements showing each payment made in the month due for the previous 12 months.
Can I use a Social Security award letter for income?
Generally yes, with proof of receipt and continuance. Income that is about to expire typically cannot be counted. Details are subject to lender guidelines and full file review.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For the program’s current guidelines, see FHA loan programs.
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References
1. HUD Housing Handbooks index
2. HUD 2019 announcement on cash-out LTV
3. HUD Mortgagee Letter 2020-30
4. HUD Mortgagee Letter 2022-09
5. Fannie Mae’s Social Security income guidance
8. CFPB ATR/QM Small Entity Compliance Guide
This article is part of Lendmire’s FHA Loan series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Can a Conventional or FHA Borrower Do a VA Cash-Out in Year One? · How to Buy Out a Spouse With an FHA Cash-Out on Retirement Income · FHA Cash-Out vs Bank Full Documentation for a Locked-In Homeowner
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.