B3-3.1-09, Other Sources of Income (05/01/2024)

Document that alimony, child support, or separate maintenance will continue to be paid for at least three years after the date of the mortgage application, as verified by one of the following:

• A copy of a divorce decree or separation agreement (if the divorce is not final) that indicates the monthly payment and states the amount of the award and the period of time over which it will be received.

  Note: If a borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the lender should not consider any proposed or voluntary payments as income.

• Any other type of written legal agreement or court decree describing the payment terms.

• Documentation that verifies any applicable state law that mandates alimony, child support, or separate maintenance payments, which must specify the conditions under which the payments must be made.

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.

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 ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns, for additional information).

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

• the borrower’s current eligibility for the disability benefits,

• the amount and frequency of the disability payments, and

• if there is a contractually established termination or modification 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.

The lender must obtain an executed copy of the borrower's offer or contract for future employment and anticipated income.

Note: The borrower cannot be employed by a family member or by an interested party to the transaction.

This option is limited to loans that meet the following criteria:

• purchase transaction,

• principal residence,

• one-unit property,

• the borrower is not employed by a family member or by an interested party to the transaction, and

• the borrower is qualified using only fixed base income.

The lender must obtain and review the borrower’s offer or contract for future employment. The employment offer or contract must

• clearly identify the employer and the borrower, be signed by the employer, and be accepted and signed by the borrower;

• clearly identify the terms of employment, including position, type and rate of pay, and start date; and

• be non-contingent. Note: If conditions of employment exist, the lender must confirm prior to closing that all conditions of employment are satisfied either by verbal verification or written documentation. This confirmation must be noted in the mortgage loan file.

Also note that for a union member who works in an occupation that results in a series of short-term job assignments (such as a skilled construction worker, longshoreman, or stagehand), the union may provide the executed employment offer or contract for future employment.

Prior to delivery, the lender must obtain the following documentation depending on the borrower’s employment start date:

• Employment offer or contract; and

• Verbal verification of employment that confirms active employment status

The lender must document, in addition to the amount of reserves required by DU or for the transaction, one of the following:

• Financial reserves sufficient to cover principal, interest, taxes, insurance, and association dues (PITIA) for the subject property for six months; or

• Financial resources sufficient to cover the monthly liabilities included in the debt-to-income ratio, including the PITIA for the subject property, for the number of months between the note date and the employment start date, plus one. For calculation purposes, consider any portion of a month as a full month.

  Financial resources may include:

  • financial reserves, and

  • current income.

  Current income refers to net income that is currently being received by the borrower (or coborrower), may or may not be used for qualifying, and may or may not continue after the borrower starts employment under the offer or contract. For this purpose, the lender may use the amount of income the borrower is expected to receive between the note date and the employment start date. If the current income is not being used or is not eligible to be used for qualifying purposes, it can be documented by the lender using income documentation, such as a paystub, but a verification of employment is not required.

The documentation must be in compliance with B1-1-03, Allowable Age of Credit Documents and Federal Income Tax ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns.

Assets must be liquid and available to the borrower and must be sourced as one of the following:

• A non-self-employed severance package or non-self-employed lump sum retirement package (a lump sum distribution) — these funds must be documented with a distribution letter from the employer (Form 1099–R) and deposited to a verified asset account.

• For 401(k) or IRA, SEP, Keogh retirement accounts – the borrower must have unrestricted access to the funds in the accounts and can only use the accounts if distribution is not already set up or the distribution amount is not enough to qualify. The account and its asset composition must be documented with the most recent monthly, quarterly, or annual statement.

“Net documented assets” are equal to the sum of eligible assets minus:

(a) the amount of the penalty that would apply if the account was completely distributed at the time of calculation; and

(b) the amount of funds used for down payment, closing costs, and required reserves.

IRA (made up of stocks and mutual funds)

$500,000

Minus 10% of $500,000 ($500,000 x .10)

(Assumes a 10% penalty applies for early distribution, which must be levied against any cash being withdrawn for closing the transaction as well as the remaining funds used to calculate the income stream.)

(-) $50,000

Total eligible documented assets

(=) $450,000

Minus funds required for closing

(down payment, closing costs, reserves)

(-) $100,000

Net Documented Assets

(=) $350,000

Monthly income calculation

($350,000/360 (or applicable term of loan in months))

See Income Calculation/Payout Stream in table below.

$972.22/month

70%

80% if the owner of the asset(s) being used to qualify is at least 62 years old at the time of closing. If the asset(s) is jointly owned, all owners must be a borrower on the loan and the borrower using the income to qualify must be at least 62 years old at the time of closing.

The lender must satisfy the standard documentation requirements based on the source and type of income as outlined in Chapter B3–3, Income Assessment.

All documents of a foreign origin must be completed in English, or the originator must provide a translation, attached to each document, and ensure the translation is complete and accurate.

Note: All income must be translated to U.S. dollars. If the borrower is not a U.S. citizen, refer to B2-2-02, Non–U.S. Citizen Borrower Eligibility RequirementsB2-2-02, Non–U.S. Citizen Borrower Eligibility Requirements, for additional information.

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.

Document a two-year history of the income, as verified by

• copies of the borrower's signed federal income tax returns, or

• copies of account statements.

If this income is used on a purchase transaction, current receipt is not required to be documented except as verified in the employer letter. For refinance transactions where the income is continuing with the new loan, the recent receipt 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 ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns, for additional information).

Payments on a note executed within the past 12 months, regardless of the duration, may not be used as stable income.

Because this income is nontaxable, the lender should develop an adjusted gross income for the borrower. See  B3-3.1-01, General Income InformationB3-3.1-01, General Income Information, for additional information.

To be used as qualifying income, the restricted stock must have vested and been distributed to the borrower without restrictions.

For performance-based awards: A minimum history of 24 months restricted stock income from the current employer is recommended. Restricted stock income received for 12 to 24 months from the current employer may be considered as acceptable income if there are positive factors to offset the shorter income history such as

• future vesting equal to or greater than previous vesting and that will continue for at least 24 months; or
• restricted stock income received for the previous 5 years from any employer.

For time-based awards: A minimum history of 12 months restricted stock income from the current employer is required.

The lender must confirm continuance of income per Continuity of Income in B3-3.1-01, General Income InformationB3-3.1-01, General Income Information.

Note: Sign-on bonuses received in the form of restricted stock that vest over any length of time cannot be considered by the lender as qualifying income.

The lender must document all the following:

• evidence stock is publicly traded;
• current vesting schedule reflecting past and future vesting;
• brokerage or bank statement showing receipt of previous year(s) distribution of restricted stock and, at a minimum, the number of vested shares or cash equivalent; and
• a completed Request for Verification of Employment (Form 1005) that shows restricted stock distributions, or the borrowers recent paystub showing receipt of restricted stock income and IRS W-2 forms covering the most recent two-year period.

The calculation method for restricted stock income will vary depending on whether payment is made is shares or cash.

For income paid in shares: 

• (200-Day Moving Average of share price x total number of distributed vested shares (pre-tax) in most recent 24 months) / 24 months

For income paid in cash:

• Total cash distributed (pre-tax) equal to the total value of vested shares in the most recent 24 months / 24 months

Note: When the borrower has a history of income ranging from 12-24 months, the lender may use the actual number of months the borrower has received the income rather than 24 months.

See Variable Income in B3-3.1-01, General Income InformationB3-3.1-01, General Income Information, for additional information about calculating variable income.

Document current receipt of the income, as verified by one or more of the following:

• a statement from the organization providing the income,

• a copy of retirement award letter or benefit statement,

• a copy of financial or bank account statement,

• a copy of signed federal income tax return,

• an IRS W-2 form, or

• an IRS 1099 form.

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. Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met.

Note: The borrower must have unrestricted access to the accounts without penalty.

Obtain copies of the

• royalty contract, agreement, or statement confirming amount, frequency, and duration of the income; and

• borrower’s most recent signed federal income tax return, including the related IRS Form 1040, Schedule E.

The borrower must provide the most recent two years of

• signed individual federal income tax returns, and
• IRS Schedule K-1.

Income reported on Schedule K-1 can only be considered if the lender obtains documentation verifying that

• the income was actually distributed to the borrower and is consistent with the level of business income being used to qualify, or
• the business has adequate liquidity to support the withdrawal of earnings. The lender may use discretion in the method used to confirm the business has adequate liquidity.

If the borrower has a two-year history of receiving “guaranteed payments to the partner” from a partnership or an LLC, these payments can be added to the borrower’s cash flow.

Note: An exception to the two-year requirement of receiving “guaranteed payments to the partner” is if a borrower has recently acquired nominal ownership in a professional services partnership (for example, a medical practice or a law firm) after having an established employment history with the partnership. In this situation, the lender may rely on the borrower’s guaranteed compensation. This must be evidenced by the borrower’s partnership agreement and further supported by evidence of current year-to-date income.

Social Security income based on another person's account/work record or from the borrower's own work record, but for the benefit of another (such as a dependent) may also be used in qualifying, provided the lender documents a 3-year continuance.

• Social Security Administration's (SSA) Award letter,
• SSA-1099,
• Most recent signed federal income tax returns (or tax transcripts³), or 
• Proof of current receipt

• SSA Award letter,
• Proof of current receipt, and
• Three-year continuance⁴

• SSA Award letter,
• SSA-1099,
• Most recent signed federal income tax returns (or tax transcripts³), or
• Proof of current receipt

• SSA Award letter,
• Proof of current receipt, and
• Three-year continuance⁴

• SSA Award letter,
• Proof of current receipt, and
• Three-year continuance⁴

• SSA Award letter, and

• Proof of current receipt

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 verify the borrower's income in accordance with Section B3–3.1, Employment and Other Sources of Income. The lender must obtain

• the amount and duration of the borrower's “temporary leave income,” which may require multiple documents or sources depending on the type and duration of the leave period; and

• the amount of the “regular employment income” the borrower received prior to the temporary leave. Regular employment income includes, but is not limited to, the income the borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commissions, and bonus).

Note: Income verification may be provided by the borrower, by the borrower's employer, or by a third-party employment verification vendor.

Obtain the following documents:

• a completed Request for Verification of Employment (Form 1005), or

• the borrower’s recent paystub, and

• IRS W-2 forms covering the most recent two-year period or the most recent two years tax returns with IRS Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to verify tips not reported by the employer.

See B3-3.1-02, Standards for Employment DocumentationB3-3.1-02, Standards for Employment Documentation, for additional information.

Obtain one or more of the following trust verification documents to confirm the amount, frequency, type of income being received, and the date the trust was created:

• a copy of the trust agreement, 
• the trustee’s statement,
• the trust's federal income tax returns, or
• a letter from an accountant or attorney who reviewed the trust documents, when the above documents are not available or when the borrower is the trustee.

Note: A borrower who is also a trustee may not supply the trustee's statement.

Confirm the trust was established for 12 months or longer, unless all of the following requirements are met:

• the trust verification documentation reflects fixed payments, 
• the borrower is not the grantor, and
• at least one payment is received prior to closing.

Trusts created in the previous 12 months using a borrower's eligible employment-related assets, as defined in Employment-Related Assets as Qualifying Income, may still be used as stable income but must meet the income calculation and all other requirements in Employment-Related Assets as Qualifying Income.

Confirm continuance of income per Continuity of Income in B3-3.1-01, General Income InformationB3-3.1-01, General Income Information. This confirmation must be based on the type of income received through the trust. For example, if the income from the trust is derived from rental income, then three-year continuance is not required. However, if the income is a fixed payment derived from a depleting asset, then three-year continuance must be determined.

If any assets from the trust are being used for down payment, closing costs, or reserves, those assets must be subtracted from the total amount before determining if the trust income meets the Continuity of Income requirements.

Use the fixed payment amount from the trust verification documentation as the borrower's qualifying income, converting it to a monthly amount, as applicable. 

Document current receipt of trust income with one month's bank statement or other equivalent documentation.

Calculate the qualifying income amount per Variable Income in B3-3.1-01, General Income InformationB3-3.1-01, General Income Information.

Document the following:

• a minimum 24-month history of trust income by obtaining copies of the borrower's signed federal tax income tax returns for the most recent two years or copies of the trust's federal income tax returns for the most recent two years, and
• current receipt of trust income with one month's bank statement or other equivalent documentation.

Note: Income received for 12 to 24 months may be considered as acceptable income when other positive factors are present that reasonably offset a shorter income history.