What is the difference between Conventional, FHA and VA Mortgage loans in Kentucky

 

Conventional vs. FHA vs. VA loans in Kentucky

 I will outline below the credit score, loan limits, down payment and mortgage insurance requirements for FHA, VA and Conventional Mortgage Loans in Kentucky!

			Upfront funding fee of 1.4% to 3.6%

Can you use Foster Income for a Kentucky Mortgage Loan Approval?

 Foster Income for a Kentucky Mortgage 

Yes, if it can be documented that foster care income has been received for the last 2 years that income is likely to continue for at least 3 years from the date of the Note, then it can be used to qualify. 

Yes, we need to show 24 months receipt of this income, possible exception if only received for 12 months, and we would need something from the agency showing this will continue for 3 years.

Foster-Care Income for a Mortgage Loan Approval

What are the guidelines?

Income received from a state- or county-sponsored organization for providing temporary care for one or more children may be considered acceptable stable income if the following requirements are met.

✓	Verification of Foster-Care Income
	Verify the foster-care income with letters of verification from the organizations providing the income.
	Document that the borrower has a two-year history of providing foster-care services. If the borrower has not been receiving this type of income for two full years, the income may still be counted as stable income if the borrower has at least a 12-month history of providing foster-care services, and the income does not represent more than 30% of the total gross income that is used to qualify for the mortgage loan.

Comparison of Guidelines for Foster Care Income by Loan Type

Different loan programs have different rules for foster care income. Below is a comparison table summarizing how each major loan type treats this income, plus their documentation and gross-up allowances:

Loan Program	Use of Foster Care Income	Required History	Continuance Required	Documentation Needed	Gross-Up (Non-Taxable)
FHA (HUD)	Allowed if stable and ongoing. Counts in DTI.	2 years providing care. Less if strong case rarely.	Must be “reasonably likely to continue” (no fixed 3-year proof, just no evidence of stopping).	Letter from agency verifying 2-year history & payments.	Up to 15% increase (if tax-free).
Conventional (Fannie Mae)	Allowed if stable. Counts in DTI.	2 years history OR 12+ months if ≤30% of total income.	No need to document 3-year continuance explicitly.	Letters from paying organization verifying income.	Up to 25% increase (standard for non-taxable income).
Conventional (Freddie Mac)	Allowed if stable. Counts in DTI.	2 years consistent receipts (no short history exception mentioned).	Should likely continue 3+ years (no lender proof required unless doubts).	Agency letters; potentially proof of continued foster placement if available.	Up to 25% increase (standard for non-taxable income).
USDA (Rural)	Not allowed as qualifying income for loan repayment.	N/A – income not counted.	N/A – income not counted.	N/A – they exclude foster payments entirely.	N/A (income can’t be used, so gross-up doesn’t apply).
VA (Veterans)	Not counted toward DTI; used only to offset foster care expenses.	No specific requirement (generally needs consistent history if considered for offset).	N/A for DTI (but must show current foster placement to offset dependents).	Possibly agency letter if using to offset residual requirement.	Generally 25% if used for ratios (but main income listed as net).

Legend: DTI = Debt-to-Income ratio (used for loan qualifying ratios).

Understanding Foster Care Income in Mortgage Approval

What counts as foster care income? 

It’s generally the stipend paid by a state or county agency to you for providing care to a foster child or adult. This income is typically non-taxable (it won’t show up on your tax returns). Lenders can count it only if it’s stable and likely to continue, and they may even “gross it up” (increase it) since it’s tax-free.

Key considerations for using foster income:

• History of Income: Most programs want a track record (often 12–24 months) of you providing foster care and receiving payments.

• Documentation: You’ll need official verification, usually letters from the agency that pays you.

• Continuance: Lenders want to know the income is likely to keep coming. Some require proof it will continue for 3 more years, while others are satisfied if no evidence suggests it will stop.

• Portion of Total Income: If foster payments are a small part of your total income, some rules are more flexible. For example, Fannie Mae will allow just 12 months of history if foster income is ≤30% of your total income.

Foster care income, typically provided by state or county-sponsored organizations to caregivers, and AFC income for adult care, are forms of government assistance. Their eligibility for mortgage qualification depends on the loan type and underwriting guidelines of agencies like FHA, Fannie Mae, Freddie Mac, VA, and USDA. 

Given the variability in lender practices and agency policies, this analysis aims to clarify conditions for using such income, drawing from multiple sources including mortgage blogs, official guides, and expert articles, with a focus on Kentucky’s unique programs.

The guidelines for using foster care and AFC income vary across loan types. Below is a detailed breakdown, organized by agency and loan program, based on recent findings as of April 2025.

• FHA Loans

  • FHA loans allow foster care income with a 12-month history if received regularly and likely to continue, aligning with their flexibility for non-traditional income sources.
  • Non-taxable income can be grossed up by 25%, enhancing qualifying potential.
  • Documentation includes a letter from the organization, bank statements showing regular deposits, and verification of continuance for at least three years, as per FHA Loan Income Requirements.
  • Perfect for first-time buyers, especially in Kentucky, given FHA’s lenient DTI ratios up to 50% with strong credit.

• Conventional Loans (Fannie Mae)

  • Fannie Mae requires a 12-month history if foster care income is no more than 30% of total gross income, or 2 years otherwise, with confirmation it will continue for at least 3 years.
  • Non-taxable income may be grossed up by 25%, similar to FHA.
  • Documentation involves letters from the foster care agency, 1099s for 2 years if applicable, and bank statements, as outlined in Fannie Mae Other Sources of Income.
  • Stricter than FHA, but suitable for borrowers with stable income histories.

• Conventional Loans (Freddie Mac)

  • Freddie Mac requires a 2-year history of receiving foster care income, with evidence it will continue for at least 3 years, reflecting a more conservative approach.
  • Non-taxable income gross-up is typically 25%, consistent with industry standards.
  • Documentation includes 1099s for 2 years and a 24-month average for calculation, ensuring consistency, as per Freddie Mac Seller/Servicer Guide.

• VA Loans

  • VA loans accept foster care income if stable and verifiable, with a 12-month documentation period often sufficient via bank statements or agency contracts.
  • Non-taxable income can be grossed up, but there’s some debate on its universal acceptance, so lender consultation is advised.
  • Documentation includes standard income verification like letters and bank statements, as noted in VA Loan Employment Requirements.
  • Great for veterans or spouses, but clarity on foster care income usage varies, requiring lender verification.

• USDA Loans

  • USDA loans do not count foster care income for eligibility purposes (income limits), as it’s excluded from household income calculations, per USDA Income Eligibility Guidelines.
  • However, it may be considered for qualification (repayment ability) if stable and reliable, with 12-month proof and verification of continuance for 3 years.
  • Gross-up allowed for non-taxable income (typically 25%), but this is less common due to eligibility exclusions.
  • Documentation includes standard verification, but usage for qualification needs lender confirmation, given rural focus and income limits.

Documentation Requirements

Across loan types allowing foster care income, documentation is critical to verify stability and continuity. Common requirements include:

• A letter from the state or county organization providing the foster care income, confirming amount, payment schedule, and expected continuation.
• Copies of the borrower’s signed federal income tax returns, particularly 1099s for non-employment income, to establish history.
• Bank statements or deposit slips showing regular deposits of foster care payments, ensuring consistency.
• For FHA loans, additional verification may involve checking state agency guidelines and the age of individuals in care, reflecting the unique nature of foster care.

The table below summarizes the key guidelines for each loan type, highlighting the minimum history, continuance requirements, and documentation needed:

Loan Type	Agency	Minimum History	Continuance	Documentation	Additional Notes
VA, USDA	N/A	Not Allowed	N/A	N/A	Foster income cannot be considered for qualification.
Conventional	Freddie Mac	2 years	3 years likely	1099s for 2 years, 24-month average for calculation	Must be from state/county-sponsored organization.
Conventional, FHA	Fannie Mae	12 months (if ≤30% of total gross income) or 2 years	Likely to continue	Letter from organization, verification of 2 years receipt	If 12 months, income must not exceed 30% of total gross income for qualification.
FHA	N/A	24 months (averaged like commission) or 2 years	Likely to continue	Letter from organization, verification of receipt, state agency guidelines, age of children	Same as Fannie Mae for 12 months/2 years, must verify stability and continuance.

This table illustrates the variability in requirements, with Fannie Mae and FHA offering more flexibility for shorter histories under certain conditions, while Freddie Mac and VA/USDA impose stricter or exclusionary rules.

Learn more below about using Foster Care Income below at the following links:

• FHA Loan Income Requirements for 2023
• Fannie Mae Other Sources of Income
• Freddie Mac Seller/Servicer Guide
• VA Loan Employment Requirements and Income Verification
• USDA Income Eligibility Guidelines and Maximum
• KHC Down Payment Assistance Program
• Lexington First-Time Homebuyer Program
• LouisvilleKY.gov Down Payment Assistance Program

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