This topic provides information on documenting and qualifying a borrower’s income from sources other than wages and salaries, including:
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, for additional information.
Current receipt may be documented by various means, depending on the income type. Examples include but are not limited to
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.
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.|
For an automobile allowance to be considered as acceptable stable income, the borrower must have received payments for at least two years. The lender must add the full amount of the allowance to the borrower’s monthly income, and the full amount of the lease or financing expenditure to the borrower’s monthly debt obligations.
Income from boarders in the borrower’s principal residence or second home is not considered acceptable stable income with the exception of the following:
When a borrower with disabilities receives rental income from a live-in personal assistant, whether or not that individual is a relative of the borrower, the rental payments can be considered as acceptable stable income in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage loan. Personal assistants typically are paid by Medicaid Waiver funds and include room and board, from which rental payments are made to the borrower.
The HomeReady mortgage eligibility requirements include an additional exception. See Chapter B5-6, HomeReady Mortgage.
The following table provides verification requirements for income from boarders.
|✓||Verification of Income from Boarders|
|Obtain documentation of the boarder’s history of shared residency (such as a copy of a driver’s license, bills, bank statements, or W-2 forms) that shows the boarder’s address as being the same as the borrower’s address.|
|Obtain documentation of the boarder’s rental payments for the most recent 12 months.|
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), 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.
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, for additional information).
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.
If the borrower is scheduled to begin employment under the terms of an employment offer or contract, the lender may deliver the loan in accordance with one of the options outlined below.
|✓||Option 1 -- Paystub Obtained Before Loan Delivery|
|The lender must obtain an executed copy of the borrower's offer or contract for future employment and anticipated income.|
|Prior to delivering the loan, the lender must obtain a paystub from the borrower that includes sufficient information to support the income used to qualify the borrower based on the offer or contract. The paystub must be retained in the mortgage loan file.|
|✓||Option 2 -- Paystub Not Obtained Before Loan Delivery|
|This option is limited to loans that meet the following criteria:
|The lender must obtain and review the borrower’s offer or contract for future employment. The employment offer or contract must
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.
|The borrower’s start date must be no earlier than 30 days prior to the note date or no later than 90 days after the note date.
Prior to delivery, the lender must obtain the following documentation depending on the borrower’s employment start date:
|If the borrower’s start date is...||Documentation Required|
|The note date or no more than 30 days prior to the note date||
|No more than 90 days after the note date||Employment offer or contract|
|The lender must document, in addition to the amount of reserves required by DU or for the transaction, one of the following:
|The lender must deliver the loan with Special Feature Code 707.|
The following table provides the requirements for employment-related assets that may be used as qualifying income.
|Assets used for the calculation of the monthly income stream must be owned individually by the borrower, or the co-owner of the assets must be a co-borrower of the mortgage loan.
The documentation 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, for additional information).
|Assets must be liquid and available to the borrower and must be sourced as one of the following:
|If a penalty would apply to a distribution of funds from the account made at the time of calculation, then the amount of such penalty applicable to a complete distribution from the account (after costs for the transaction) must be subtracted to determine the income stream from these assets.|
|If the employment–related assets are in the form of stocks, bonds, and mutual funds, 70% of the value (remaining after costs for the transaction and consideration of any penalty) must be used to determine the income stream to account for the volatile nature of these assets.|
|A borrower shall only be considered to have unrestricted access to a 401(k) or IRA, SEP, Keogh retirement account if the borrower has, as of the time of calculation, the unqualified and unlimited right to request a distribution of all funds in the account (regardless of any possible tax withholding or applicable penalty applied to such distribution).|
“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;
(b) the amount of funds used for down payment, closing costs, and required reserves;
(c) 30% of the remaining value of any stocks, bonds, or mutual funds assets (after the calculation in (b)).
|Ineligible assets are non-employment-related assets (for example, stock options, non-vested restricted stock, lawsuits, lottery winnings, sale of real estate, inheritance, and divorce proceeds). Checking and savings accounts are generally not eligible as employment-related assets, unless the source of the balance in a checking or savings account was from an eligible employment-related asset (for example, a severance package or lump sum retirement distribution).|
|Example: Calculation of Net Documented Assets|
IRA (made up of stocks and mutual funds)
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.)
Total eligible documented assets
(=) $ 450,000
Minus funds required for closing
(down payment, closing costs, reserves)
(=) $ 350,000
Minus 30% of $350,000 ($350,000 x .30)
(b) Net Documented Assets
Monthly income calculation
($245,000/360 (or applicable term of loan in months))
See Income Calculation/Payout Stream in table below.
All of the following loan parameters must be met in order for employment-related assets to be used as qualifying income:
|Maximum LTV, CLTV, and HCLTV Ratio||
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.
|Minimum Credit Score||
Manual: Higher of 620 or minimum credit score per the Eligibility Matrix
|Loan Purpose||Purchase and limited cash-out refinance only|
|Occupancy||Principal residence and second home only|
|Number of Units||As permitted by occupancy type|
|Income Calculation/Payout Stream||Divide “Net Documented Assets” by the amortization term of the mortgage loan (in months).|
Foreign income is income that is earned by a borrower who is employed by a foreign corporation or a foreign government and is paid in foreign currency. Borrowers may use foreign income to qualify if the following requirements are met.
|✓||Verification of Foreign Income|
|Copies of his or her signed federal income tax returns for the most recent two years that include foreign income.|
|The lender must satisfy the standard documentation requirements based on the source and type of income as outlined in Chapter B3–3, Income Assessment.
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
A housing or parsonage allowance may be considered qualifying income if there is documentation that it has been received for the most recent 12 months and the allowance is likely to continue for the next three years. The housing allowance may be added to income but may not be used to offset the monthly housing payment.
The following table provides verification requirements for interest and dividends income.
|✓||Verification of Income From Interest and Dividends|
|Verify the borrower’s ownership of the assets on which the interest or dividend income was earned. 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, for additional information).|
|Document a two-year history of the income, as verified by
|Develop an average of the income received for the most recent two years. Refer to the Variable Income section of B3-3.1-01, General Income Information, for additional information.|
|Subtract any assets used for down payment or closing costs from the borrower’s total assets before calculating expected future interest or dividend income.|
States and municipalities can issue mortgage credit certificates (MCCs) in place of, or as part of, their authority to issue mortgage revenue bonds. MCCs enable an eligible first-time home buyer to obtain a mortgage secured by his or her principal residence and to claim a federal tax credit for a specified percentage (usually 20% to 25%) of the mortgage interest payments.
When calculating the borrower’s DTI ratio, treat the maximum possible MCC income as an addition to the borrower’s income, rather than as a reduction to the amount of the borrower’s mortgage payment. Use the following calculation when determining the available income:
[(Mortgage Amount) x (Note Rate) x (MCC %)] ÷ 12 = Amount added to borrower’s monthly income.
For example, if a borrower obtains a $100,000 mortgage that has a note rate of 7.5% and he or she is eligible for a 20% credit under the MCC program, the amount that should be added to his or her monthly income would be $125 ($100,000 x 7.5% x 20% = $1500 ÷ 12 = $125).
The lender must obtain a copy of the MCC and the lender’s documented calculation of the adjustment to the borrower’s income and include them in the mortgage loan file.
For refinance transactions, the lender may allow the MCC to remain in place as long as it obtains confirmation prior to loan closing from the MCC provider that the MCC remains in effect for the new mortgage loan. Copies of the MCC documents, including the reissue certification, must be maintained in the new mortgage loan file.
An employer may subsidize an employee’s mortgage payments by paying all or part of the interest differential between the employee’s present and proposed mortgage payments.
When calculating the qualifying ratio, the differential payments should be added to the borrower’s gross income.
The payments may not be used to directly offset the mortgage payment, even if the employer pays them to the mortgage lender rather than to the borrower.
The following table provides verification requirements for mortgage differential payment income.
|✓||Verification of Income From Mortgage Differential Payments|
|Obtain written verification from the borrower’s employer confirming the subsidy and stating the amount and duration of the payments.|
|Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application.
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 Returns, for additional information).
DU will consider a non-occupant borrower’s income as qualifying income for a principal residence with certain LTV ratio limitations.
For manually underwritten loans, the income from a non-occupant 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 income, 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 a willingness to make the mortgage payments and maintain homeownership. If the income from a non-occupant borrower is used for qualifying, the LTV ratios are limited.
See B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction, for information about the maximum LTV, CLTV, and HCLTV ratios that apply when non-occupant borrower income is used for qualifying purposes for both DU and manually underwritten loans.
The following table provides verification requirements for notes receivable income.
|✓||Verification of Income From Notes Receivable|
|Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application.|
|Obtain a copy of the note to establish the amount and length of payment.|
|Document regular receipt of income for the most recent 12 months.
Payments on a note executed within the past 12 months, regardless of the duration, may not be used as stable income.
The following table provides verification requirements for public assistance income.
|✓||Verification of Public Assistance Income|
|Document the borrower’s receipt of public assistance income with letters or exhibits from the paying agency that state the amount, frequency, and duration of the benefit payments.|
|Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application.|
The Housing Choice Voucher Program (more commonly known as Section 8) is also an acceptable source of qualifying income. There is no requirement for the Section 8 voucher payments to have been received for any period of time prior to the date of the mortgage application or for the payments to continue for any period of time from the date of the mortgage application.
|✓||Verification of Section 8 Payment Vouchers|
|Determine from the public agency that issues the vouchers the monthly payment amount and whether the income is nontaxable.
If the income is nontaxable, the lender can develop an adjusted gross income for the borrower. See B3-3.1-01, General Income Information, for additional information.
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, for additional information).
If a borrower’s retirement, annuity, or pension income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See B3-2-02, DU Validation Service.
The following table provides verification requirements for royalty income.
|✓||Verification of Income From Royalty Payments|
|Obtain copies of the
|Confirm that the borrower has received royalty payments for at least 12 months and that the payments will continue for a minimum of three years after the date of the mortgage application.|
Refer to the Variable Income section of B3-3.1-01, General Income Information, for additional information.
For borrowers who have less than 25% ownership of a partnership, S corporation, or limited liability company (LLC), ordinary income, net rental real estate income, and other net rental income reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1 may be used in qualifying the borrower provided the lender can confirm the business has adequate liquidity to support the withdrawal of earnings. If the Schedule K-1 provides this confirmation, no further documentation of business liquidity is required.
The following table provides verification of income requirements for Schedule K-1 borrowers with less than 25% ownership of a partnership, an S corporation, or an LLC.
|✓||Verification of Schedule K-1 Income|
|If the Schedule K-1 reflects a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify, then no further documentation of access to the income or adequate business liquidity is required. The Schedule K-1 income may then be included in the borrower’s cash flow.|
|If the Schedule K-1 does not reflect a documented, stable history of receiving cash distributions of income from the business consistent with the level of business income being used to qualify, then the lender must confirm 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.
The borrower must provide the most recent two years of signed individual federal income tax returns and the most recent two years of IRS Schedule K-1.
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 1||Borrower is drawing Social Security benefits from another person’s account/work record 2|
|Supplement Security Income (SSI)||
If a borrower’s Social Security income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See B3-2-02, DU Validation Service.
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. 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
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). 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 B3-3.5-01, Income and Employment Documentation for DU, for data entry guidance.
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, 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, 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.
The following table provides verification requirements for trust income.
|✓||Verification of Trust Income|
|Confirm the trust income by obtaining a copy of the trust agreement or the trustee’s statement confirming the amount, frequency, and duration of payments.|
|Verify that the trust income will continue for at least three years from the date of the mortgage application.
Unless this income is received monthly, documentation of current receipt of the income is not required to comply with the Allowable Age of Credit Documents policy.
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, for additional information about verifying seasonal income.|
The following table provides verification requirements for income from VA benefits.
|✓||Verification of VA Benefits Income|
|Document the borrower’s receipt of VA benefits with a letter or distribution form from the VA.|
|Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. (Verification is not required for VA retirement or long-term disability benefits.)|
An SSA Award letter may be used to document the income if the borrower is receiving Social Security payments or if the borrower will begin receiving payments on or before the first payment date of the subject mortgage as confirmed by a recently issued award letter.
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).