Selling Guide

Published November 03, 2021

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B3-3.1-01, General Income Information (12/16/2020)


This topic contains information on employment income, including:


Stable and Predictable Income

Fannie Mae’s underwriting guidelines emphasize the continuity of a borrower’s stable income. The stable and reliable flow of income is a key consideration in mortgage loan underwriting. Individuals who change jobs frequently, but who are nevertheless able to earn consistent and predictable income, are also considered to have a reliable flow of income for qualifying purposes.

To demonstrate the likelihood that a consistent level of income will continue to be received for borrowers with less predictable sources of income, the lender must obtain information about prior earnings. Examples of less predictable income sources include commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradesmen.


Variable Income

All income that is calculated by an averaging method must be reviewed to assess the borrower’s history of receipt, the frequency of payment, and the trending of the amount of income being received. Examples of income of this type include income from hourly workers with fluctuating hours, or income that includes commissions, bonuses, or overtime.

History of Receipt: Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may be considered as acceptable income, as long as the borrower’s loan application demonstrates that there are positive factors that reasonably offset the shorter income history.

Frequency of Payment: The lender must determine the frequency of the payment (weekly, biweekly, monthly, quarterly, or annually) to arrive at an accurate calculation of the monthly income to be used in the trending analysis (see below). Examples:

  • If a borrower is paid an annual bonus on March 31st of each year, the amount of the March bonus should be divided by 12 to obtain an accurate calculation of the current monthly bonus amount. Note that dividing the bonus received on March 31st by three months produces a much higher, inaccurate monthly average.

  • If a borrower is paid overtime on a biweekly basis, the most recent paystub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income. For example, borrowers may have overtime income that is cyclical (transportation employees who operate snow plows in winter, package delivery service workers who work longer hours through the holidays). The lender must investigate the difference between current period overtime and year-to-date earnings and document the analysis before using the income amount in the trending analysis.

Income Trending: After the monthly year-to-date income amount is calculated, it must be compared to prior years’ earnings using the borrower’s W-2’s or signed federal income tax returns (or a standard Verification of Employment completed by the employer or third-party employment verification vendor).

  • If the trend in the amount of income is stable or increasing, the income amount should be averaged.

  • If the trend was declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used.

  • If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the declination occurred.


Continuity of Income

A key driver of successful homeownership is confidence that all income used in qualifying the borrower will continue to be received by the borrower for the foreseeable future. Unless the lender has knowledge to the contrary, if the income does not have a defined expiration date and the applicable history of receipt of the income is documented (per the specific income type), the lender may conclude that the income is stable, predictable, and likely to continue. The lender is not expected to request additional documentation from the borrower.

If the income source does have a defined expiration date or is dependent on the depletion of an asset account or other limited benefit, the lender must document the likelihood of continued receipt of the income for at least three years.

If the lender is notified that the borrower is transitioning to a lower pay structure, for example due to pending retirement, the lender must use the lower amount to qualify the borrower.

The following table contains examples of income types with and without defined expiration dates. This information is provided to assist lenders in determining whether additional income documentation may be necessary to support a three-year continuance. Note that lenders remain responsible for making the final determination of whether the borrower’s specific income source has a defined expiration date.

Expiration Date Not Defined Defined Expiration Date*

Lender does not need to document 3–year continuance

  • automobile allowance

  • base salary

  • bonus, overtime, commission, or tip income

  • capital gains income

  • corporate retirement or pension

  • disability income — long-term

  • foster-care income

  • interest and dividend income (unless other evidence that asset will be depleted)

  • military income

  • mortgage credit certificates

  • part-time job, second job, or seasonal income

  • rental income

  • self-employment income

  • Social Security, VA, or other government retirement or annuity

Lender must document 3–year continuance

  • alimony, child support, or separate maintenance

  • distributions from a retirement account – for example, 401(k), IRA, SEP, Keogh

  • mortgage differential payments

  • notes receivable

  • public assistance

  • royalty payment income

  • Social Security (not including retirement or long-term disability)

  • trust income

  • VA benefits (not including retirement or long-term disability)

*Because these income sources have a defined expiration date or allow the depletion of an asset, care must be taken when this is the sole source or majority of qualifying income. Lenders must consider the borrower’s continued capacity to repay the mortgage loan when the income source expires or the distributions will deplete the asset prior to maturation of the mortgage loan.

Income sources that are not listed above will require lender judgment to determine if documentation of continuance must be obtained.


Determining the Need for Federal Income Tax Returns

The lender must obtain copies of the borrower’s signed federal income tax returns filed with the IRS for the past one or two years (depending on the income type) for the following sources of income or employment. Refer to the applicable topics in Chapter B3-3, Income Assessment for additional information about specific tax return requirements.

Tax returns are required if the borrower

  • is employed by family members (two years’ returns);

  • is employed by interested parties to the property sale or purchase (two years’ returns);

  • receives rental income from an investment property;

  • receives income from temporary or periodic employment (or unemployment) or employment that is subject to time limits, such as a contract employee or a tradesman;

  • receives income from capital gains, royalties, or other miscellaneous non-employment earnings reported on IRS Form 1099;

  • receives income that cannot otherwise be verified by an independent and knowledgeable source (two years’ returns);

  • uses foreign income to qualify;

  • uses interest and dividend income to qualify;

  • uses tip income reported on IRS Form 4137 that was not reported by the employer on the W-2 to qualify; or

  • receives income from sole proprietorships, limited liability companies, partnerships, or corporations, or any other type of business structure in which the borrower has a 25% or greater ownership interest. Borrowers with a 25% or greater ownership interest are considered self-employed. The lender must document and underwrite the loan application using the requirements for self-employed borrowers, as described in Section B3–3.2, Self-Employment Income. Note that for DU loan casefiles, only the most recent year of tax returns may be required.

If a borrower’s income is validated by the DU validation service, lenders are not required to determine if the borrower is employed by a family member or interested party to the property sale or purchase. See B3-2-02, DU Validation Service.

See B3-3.1-06, Requirements and Uses of IRS IVES Request for Transcript of Tax Return Form 4506-C, for information about obtaining tax return transcripts.


Verification of Income for Non-U.S. Citizen Borrowers

The following table describes income verification requirements for borrowers who are non-U.S. citizens:

Employment Type Employment and Income Verification Requirements
Salaried or commissioned borrower employed by a U.S. company or individual Same as for a U.S. citizen. See Section B3-3.1, Employment and Other Sources of Income.
Self-employed Same as for a U.S. citizen. See Section B3-3.2, Self-Employment Income.
Employed by a foreign corporation or a foreign government and paid in foreign currency (“foreign income”) The lender must obtain:
  • copies of the borrower's signed federal income tax returns filed with the IRS for the most recent two-year period, and

  • documentation to satisfy the standard documentation requirements in this Chapter.

Note: All income must be translated to U.S. dollars.

For information on U.S. citizens earning foreign income, refer to B3-3.1-09, Other Sources of Income.


Using Nontaxable Income to Adjust the Borrower’s Gross Income

The lender should give special consideration to regular sources of income that may be nontaxable, such as child support payments, Social Security benefits, workers’ compensation benefits, certain types of public assistance payments, and food stamps.

The lender must verify that the particular source of income is nontaxable. Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the nontaxable status of the income.

If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the lender may develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25% of the nontaxable income to the borrower’s income.

If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower’s nontaxable income, the lender may use that amount to develop the adjusted gross income, which should be used in calculating the borrower’s qualifying ratio.


Reduced Income Documentation Requirements for High LTV Refinance Loans

For certain high LTV refinance loans, lenders are not required to follow the income documentation requirements described in this Chapter. Refer to Chapter B5-7: High Loan-to-Value Refinance Option for specific requirements.

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