In general, the Part 5 definition of income counts the actual income generated by the asset, such as the interest on a savings or checking account, for the purpose of determining "annual income."
This income is counted even if the household elects not to receive it. For example, though an applicant may elect to reinvest the interest or dividends from an asset, the interest or dividends are still counted as income.
As with other forms of income, the income from assets that is included when determining Part 5 annual income is the income that is anticipated to be received from the asset during the coming 12 months.
Several methods may be used to approximate the income from the asset. For example, to obtain the anticipated interest on a savings account, the current account balance can be multiplied by the current interest rate applicable to the account. Alternatively, if the value of the account is not anticipated to change in the near future and the interest rate has been stable, a copy of the IRS 1099 form showing past interest earned can be used.
Many PJs are surprised to learn that checking account balances (as well as savings account balances) are considered an asset. This rule is not intended to count monthly income as an asset, but rather, is a recognition that some households keep assets in their checking accounts.
To avoid counting monthly income as an asset, a PJ should use the average monthly balance over a six-month period as the cash value of the checking account.
For most assets, calculating cash value and the income from the assets is straightforward. However, special rules have been established to address the following two circumstances:
- situations in which the assets produce little or no income, and
- assets that are disposed of for less than fair market value.
Determining Asset Income- Assets with Little or no Income
The Part 5 regulations assume that a household with assets has an increased payment ability, even if the assets do not currently produce income. For example, a household may own land that is not rented or otherwise currently used to produce income.
Rather than require the household to dispose of the property, the Part 5 rule requires that an "imputed" income be calculated based on a Passbook Rate applied to the cash value of all assets. (The Passbook Rate is established periodically by HUD.)
This rule only applies if the total cash value of all assets is more than $5,000.
Click here to see some examples of applying this Part 5 rule.
The current Passbook Rate can be obtained by contacting your HUD Field Office
Assets Sold Below Fair Market Value
- The Cayhill family has $6,000 (average balance over six months) in a non interest-bearing checking account. The PJ would include in the annual income an amount based on the current Passbook Rate. The calculation would be: $6,000 x .02 = $120.
- The Shaw family has $3,000 (average balance over six months) in a non interest-bearing checking account and $5,500 in an interest-bearing savings account. The family reports and the PJ verifies $150 interest on the savings account. The PJ would count the greater of the actual income from assets or the imputed income based on the Passbook Rate, as shown below:
Imputed income ($8,500 x .02) = $170Actual income = $150Included in "annual income" = $170
- The Smiths have $600 (average balance over six months) in a non interest-bearing checking account. No income from assets would be counted because the family has no actual income from assets and the total amount of all assets is less than $5,000.
Applicants who dispose of assets for less than fair market value have, in essence, voluntarily reduced their ability to afford housing.
- The Part 5 rules therefore require that any asset disposed of for less than fair market value during the two years preceding the income determination be counted as if the household still owned the asset.
- Fair market value is the value of an asset on the open market in an "arm's length transaction."
- Each applicant must certify whether an asset has been disposed of for less than fair market value during the two years preceding the income determination.
- Assets disposed of for less than fair market value as a result of foreclosure or bankruptcy are not included in this calculation.
- In the case of a disposition as part of a separation or divorce settlement, the disposition will not be considered to be less than fair market value if the applicant receives (or received) important consideration not measurable in dollar terms.
- Check out the HUD-approved certification form available on the HOME Front's Sample Forms module for assistance.
- The amount to be included as an asset for purposes of calculating Part 5 annual income is the difference between the cash value of the asset and the amount that was actually received (if any) in the disposition of the asset.
- Mr. Jones cashed in stock to give a granddaughter funds for college in August 1997. The stock had a market value of $4,500 and a broker fee of $500 was charged for the transaction.
|Less broker's fee
|Cash value to be considered
The $4,000 in assets would be counted for any income determination conducted until August 1999 (looking forward two years from the time of disposition).
If Mr. Jones has no other assets, no income from assets would be included in annual income because the cash value of the asset is less than $5,000. If other assets brought the total assets to more than $5,000, however, an imputed income calculation would be required.
- Mrs. Dutch "sold" a piece of property to a family member for $30,000 on July 1, 1997. The home was valued at $75,000 and had no loans against it.
|Less settlement costs
|Less sales price
|Cash value to be considered
The $42,000 would be counted as an asset for any income determination conducted until July 1, 1999. This amount would be combined with the cash value of other assets (if any), and an imputed income calculation would be required.