Did you ever think that you could qualify for a mortgage and then couldn’t? We go inside Fannie Mae’s guidelines to give you the true bottom line on what income actually CAN be used to qualify for a mortgage. Qualifying for a mortgage is much easier if you get paid a salary or hourly wage with a guarantee of a certain amount of hours. Often situations require the use of more obscure sources of income.
This topic provides information on documenting and qualifying a borrower’s income from sources other than wages and salaries, including:
- Documentation Requirements for Current Receipt of Income
- Alimony or Child Support
- Capital Gains Income
- Disability Income — Long-Term
- Employment Offers or Contracts
- Non-Occupying Co-Borrower Income
- Retirement, Government Annuity, and Pension Income
- Social Security Income
- Temporary Leave Income
- Tip Income
- Unemployment Benefits Income
- VA Benefits Income
Here are the actual guidelines from Fannie Mae:
Documentation Requirements for Current Receipt of Income
The documentation required for each income source is described below. The documentation must support the history of receipt, if applicable, and the amount, frequency, and duration of the income. In addition, evidence of current receipt of the income must be obtained in compliance with the Allowable Age of Credit Documents policy, unless specifically excluded below. See B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns (08/26/2014), for additional information.
Current receipt may be documented by various means, depending on the income type. Examples include but are not limited to
- current paystubs,
- bank statements confirming direct deposit,
- canceled checks from the payer’s account to the borrower,
- court records, or
- copies of the borrower’s bank statements showing the regular deposit of these funds.
Alimony or Child Support
The following table provides verification requirements for alimony or child support.
|✓||Verification of Income From Alimony or Child Support|
|Document that alimony or child support will continue to be paid for at least three years after the date of the mortgage application, as verified by one of the following:
|Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid.|
|Document no less than six months of the borrower’s most recent regular receipt of the full payment.|
|Review the payment history to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer. Income received for less than six months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.|
Capital Gains Income
Income received from capital gains is generally a one-time transaction; therefore, it should not be considered as part of the borrower’s stable monthly income. However, if the borrower needs to rely on income from capital gains to qualify, the income must be verified in accordance with the following requirements.
|✓||Verification of Capital Gains Income|
|Document a two-year history of capital gains income by obtaining copies of the borrower’s signed federal income tax returns for the most recent two years, including IRS Form 1040, Schedule D.|
|Develop an average income from the last two years (according to the Variable Income section of B3-3.1-01, General Income Information (08/20/2013)), and use the averaged amount as part of the borrower’s qualifying income as long as the borrower provides current evidence that he or she owns additional property or assets that can be sold if extra income is needed to make future mortgage loan payments.Note: Capital losses identified on IRS Form 1040, Schedule D, do not have to be considered when calculating income or liabilities, even if the losses are recurring.
Due to the nature of this income, current receipt of the income is not required to comply with the Allowable Age of Credit Documents policy. However, documentation of the asset ownership must be in compliance with the Allowable Age of Credit Documents policy (see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns (08/26/2014), for additional information).
Disability Income — Long-Term
The following table provides verification requirements for long-term disability income. It does not apply to disability income that is received from the Social Security Administration. See the applicable section below for information on Social Security income.
|✓||Verification of Long-Term Disability Income|
|Obtain a copy of the borrower’s disability policy or benefits statement from the benefits payer (insurance company, employer, or other qualified disinterested party) to determine
|Generally, long-term disability will not have a defined expiration date and must be expected to continue. The requirement for re-evaluation of benefits is not considered a defined expiration date.If a borrower is currently receiving short-term disability payments that will decrease to a lesser amount within the next three years because they are being converted to long-term benefits, the amount of the long-term benefits must be used as income to qualify the borrower. For additional information on short-term disability, see Temporary Leave Income below.|
Employment Offers or Contracts
If the borrower is scheduled to begin employment after the loan closes, the lender may, depending on its risk appetite, use the borrower’s offer or contract for future employment and income to underwrite and close the loan. If receipt of the income or employment information cannot be obtained prior to delivery to Fannie Mae, the loan is ineligible for delivery.
|✓||Verification of Employment Offers or Contracts|
|The lender must document the borrower’s income and employment history per B3-3.1-01, General Income Information (08/20/2013).|
|The lender must obtain the borrower’s offer or contract for future employment and anticipated income. The lender must determine whether to close the mortgage loan prior to the borrower beginning the new employment.|
|The borrower must begin employment before the lender delivers the loan to Fannie Mae. The lender must obtain a paystub from the borrower that includes sufficient information to support the income used to qualify the borrower prior to delivering the loan. The paystub must be retained in the mortgage loan file.|
Non-Occupying Co-Borrower Income
For manually underwritten loans the income from a non-occupant co-borrower may be considered as acceptable qualifying income. This income can offset certain weaknesses that may be in the occupant borrower’s loan application, such as limited financial reserves or limited credit history. However, it may not be used to offset significant or recent instances of major derogatory credit in the occupant borrower’s credit history. The occupant borrower must still reasonably demonstrate an ability and willingness to make the mortgage payments and maintain homeownership. If the income from a non-occupant co-borrower is used for qualifying, the LTV ratio is limited to 90%. DU does not consider non-occupant co-borrower’s income as qualifying income.
The LTV ratio for a manually underwritten mortgage loan with a non-occupant co-borrower must be 90% or less, and 95% or less for loan casefiles underwritten with DU.
DU will analyze the risk factors in the loan casefile without the benefit of the non-occupant co-borrower’s income (and will not require verification of his or her employment or income).
Retirement, Government Annuity, and Pension Income
The following table provides verification requirements for retirement and pension income.
|✓||Verification of Retirement and Pension Income|
|Document regular and continued receipt of the income, as verified by
|If retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application. In addition
Documentation of asset ownership must be in compliance with the Allowable Age of Credit Documents policy (see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns (08/26/2014), for additional information).
Social Security Income
The following table provides verification requirements for Social Security income.
|✓||Verification of Social Security Income|
|Social Security income for retirement or long-term disability that the borrower is drawing from his or her own account/work record will not have a defined expiration date and must be expected to continue.However, if Social Security benefits are being paid as a benefit for a family member of the benefit owner, that income may be used in qualifying if the lender obtains documentation that confirms the remaining term is at least three years from the date of the mortgage application.|
|Document regular receipt of payments, as verified by the following, depending on the type of benefit and the relationship of the beneficiary (self or other) as shown in the table below.|
|Type of Social Security benefit||Borrower is drawing Social Security benefits from own account/work record||Borrower is drawing Social Security benefits from another person’s account/work record 1|
|Supplement Security Income (SSI)||
1 Examples of how a borrower might draw Social Security benefits from another person’s account/work record and use the income for qualifying:
- A borrower may be eligible for benefits from a spouse, ex-spouse, or dependent parents (the benefit is paid to the borrower on behalf of the spouse, etc.); or
- A borrower may use Social Security income received by a dependent (a minor or disabled dependent).
Temporary Leave Income
Temporary leave from work is generally short in duration and for reasons of maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or the borrower’s employer. Borrowers on temporary leave may or may not be paid during their absence from work.
If a lender is made aware that a borrower will be on temporary leave at the time of closing of the mortgage loan and that borrower’s income is needed to qualify for the loan, the lender must determine allowable income and confirm employment as described below.
|✓||Temporary Leave — Employment Requirements|
|The borrower’s employment and income history must meet standard eligibility requirements as described in Section B3–3.1, Employment and Other Sources of Income.|
|The borrower must provide written confirmation of his or her intent to return to work.|
|The lender must document the borrower’s agreed-upon date of return by obtaining, either from the borrower or directly from the employer (or a designee of the employer when the employer is using the services of a third party to administer employee leave), documentation evidencing such date that has been produced by the employer or by a designee of the employer.Examples of the documentation may include, but are not limited to, previous correspondence from the employer or designee that specifies the duration of leave or expected return date or a computer printout from an employer or designee’s system of record. (This documentation does not have to comply with the Allowable Age of Credit Documents policy.)|
|The lender must receive no evidence or information from the borrower’s employer indicating that the borrower does not have the right to return to work after the leave period.|
|The lender must obtain a verbal verification of employment in accordance with B3-3.1-07, Verbal Verification of Employment (08/20/2013). If the employer confirms the borrower is currently on temporary leave, the lender must consider the borrower employed.|
|The lender must verify the borrower’s income in accordance with Section B3–3.1, Employment and Other Sources of Income. The lender must obtain
Note: Income verification may be provided by the borrower, by the borrower’s employer, or by a third-party employment verification vendor.
Requirements for Calculating Income Used for Qualifying
If the borrower will return to work as of the first mortgage payment date, the lender can consider the borrower’s regular employment income in qualifying.
If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of the borrower’s temporary leave income (if any) or regular employment income. If the borrower’s temporary leave income is less than his or her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see B3-4.1-01, Minimum Reserve Requirements (09/24/2013)). Following are instructions on how to calculate the “supplemental income”:
Supplemental income amount = available liquid reserves divided by the number of months of supplemental income
- Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
- Number of months of supplemental income: the number of months from the first mortgage payment date to the date the borrower will begin receiving his or her regular employment income, rounded up to the next whole number.
After determining the supplemental income, the lender must calculate the total qualifying income.
Total qualifying income = supplemental income plus the temporary leave income
The total qualifying income that results may not exceed the borrower’s regular employment income.
Regular income amount: $6,000 per month
Temporary leave income: $2,000 per month
Total verified liquid assets: $30,000
Funds needed to complete the transaction: $18,000
Available liquid reserves: $12,000
First payment date: July 1
Date borrower will begin receiving regular employment income: November 1
Supplemental income: $12,000/4 = $3,000
Total qualifying income: $3,000 + $2,000 = $5,000
For loan casefiles underwritten with DU, refer to B3-3.3-01, Income and Employment Documentation for DU (05/28/2013), for data entry guidance.
Note: These requirements apply if the lender becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the lender must not ask if he or she intends to take leave in the future.
The following table provides verification requirements for tip income.
|✓||Verification of Tip Income|
|Obtain the following documents:
See B3-3.1-02, Standards for Employment Documentation (05/28/2013), for additional information.
|Tip income may be used to qualify the borrower if the lender verifies that the borrower has received it for the last two years.|
|The lender must determine the amount of tip income that may be considered in qualifying the borrower. Refer to the Variable Income section of B3-3.1-01, General Income Information (08/20/2013), for additional information.|
Tip income must be entered in DU in the Other Monthly Income section of the loan application as “Other Types of Income” and verified according to these requirements.
Unemployment Benefits Income
The following table provides verification requirements for income from unemployment benefits, such as those received by seasonal workers.
|✓||Verification of Income From Unemployment Benefits|
|Document that the borrower has received the payments consistently for at least two years by obtaining copies of signed federal income tax returns.|
|Unemployment compensation cannot be used to qualify the borrower unless it is clearly associated with seasonal employment that is reported on the borrower’s signed federal income tax returns. Verify that the seasonal income is likely to continue. See B3-3.1-05, Secondary Employment Income (Second Job and Multiple Jobs) and Seasonal Income (05/27/2014), for additional information about verifying seasonal income.|
Note: Unemployment compensation may be used in qualifying a borrower for a DU Refi Plus or Refi Plus mortgage loan whether it is seasonal or non-seasonal. See B5-5.2-02, DU Refi Plus and Refi Plus Underwriting Considerations (05/27/2014), for income documentation requirements.
VA Benefits Income
The following table provides verification requirements for income from VA benefits.
Note: Education benefits are not acceptable income because they are offset by education expenses.