by usezloan | Aug 12, 2021 | Financial study
융자지식181- TYPES OF INCOME
TYPES OF INCOME
ALIMONY OR CHILD SUPPORT
In order for alimony or child support to be considered as acceptable stable, income, it must continue for
at least three years after the date of the mortgage application. We will accept as verification that
alimony or child support will continue to be paid with a copy of the divorce decree, or separation
agreement if the divorce is not final, that provides for the payment of alimony or child support and
states the amount of the award and the period of time over which it will be received; any other type of
written legal agreement or court decree that describes the payment terms for the alimony or child
support; or any application state law that requires alimony, child support, or maintenance payments and
specifies the conditions under which the payments must be made. Voluntary or proposed payments
may not be used as income. When determining the acceptability of this type of income, the lender
should take into consideration the stability of the borrower’s regular receipt of the full payment due and
any 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. 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 when qualifying the
borrower.
The borrower must provide acceptable evidence of his or her receipt of funds for alimony or child
support or maintenance payments, such as deposit slips, court records, copies of signed federal
income tax returns that were filed with the IRS or copies of the borrower’s bank statements that show
the regular deposit of these funds. A lender’s underwriting analysis should take into consideration the
regularity and timeliness of the payments, as well as whether the borrower received all or only part of
the full amount that was due.
Document no less than six months of the borrower’s most recent regular receipt of the full payment. 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. When a borrower has been receiving full, regular, and
timely payments for alimony or child support or maintenance for fewer than six months, the income may
not be considered as stable income, although, if the income is adequately documented, the lender may
use it to justify a higher qualifying ratio.
When a borrower has been receiving full or partial payments for alimony or child support or
maintenance on an inconsistent or sporadic basis, the income may not be considered as stable income
or be used to justify a higher qualifying ratio.
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ANNUITY INCOME
Annuity income is similar to pension and Social Security income except that it may not be payable for
life. A copy of the most recent updated annuity renewal statement showing the effective date, amount,
frequency, and duration of the benefit payments showing income will continue for at least three years
must be obtained.
AUTOMOBILE ALLOWANCES
The full amount of an automobile allowance may be included as income and the lease or financing
expenditure must be included as a debt in the calculation of the debt-to-income ratio. The borrower
must have received the payments for the last two consecutive years.
BOARDER INCOME
Fannie Mae
Rental income from boarders in a 1-unit property that is also the borrower’s principal residence or
second home is not generally 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 income that is
used to qualify the borrower for the mortgage. Personal assistances typically are paid by
Medical Waiver funds and include room and board, form which rental payments are made to
the borrower.
• HomeReady has an additional exception, refer to Fannie Mae HomeReady, Doc. #5318.
Freddie Mac
Rental income from boarders in a 1-unit property that is also the borrower’s principal residence,
including an accessory unit, is not generally considered acceptable stable income with the
exception of the following:
• When a borrower with disabilities receives rental income from a live-in-aide. Personal aides
typically are paid by Medical Waiver funds and include room and board, form which rental
payments are made to the borrower. Must have receipt of income for the most recent 12
months and may be considered in an amount up to 30% of the total income used to qualify.
BONUS INCOME
For additional employment income requirements pertaining to bonus see Variable Income section.
CAPITAL GAINS INCOME
Income received from a capital gain is generally a one-time transaction; therefore, it should not usually
be considered as part of the borrower’s stable monthly income. However, if the borrower needs to rely
on the income from capital gains to qualify for the mortgage, copies of the borrower’s signed federal
income tax returns that were filed with the IRS for the past two years, including the related Capital
Gains and Losses (Schedule D to IRS Form 1040) must be obtained. When the borrower’s tax returns
show that he or she has realized capital gains for the last two years, develop an average income from
capital gains and use that amount as part of the borrower’s qualifying income, as long as the borrower
provides evidence that he or she owns additional property or assets that can be sold if extra income is
needed to make future mortgage payments.
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The sale of real estate is not acceptable to be used as qualifying income unless documentation can
establish that the borrower does this for a living.
MINISTER/CLERGY/HOUSING/PARSONAGE INCOME
Clergy income must be reported as wage, parsonage, housing or honorarium income on filed returns to
be considered for qualification. Income cannot be documented solely with a WVOE (form 1005). If the
parsonage or honorarium income is not reported on the filed returns, but is reflected in box 14 of the
W2 or box 3 of the 1099, the income can be used for qualifying purposes. If the borrower is considered
self-employed and the income is not reported on the filed returns the income can be used for qualifying
purposes if the borrower provides the IRS Form 4361, Application for Exemption from Self-Employed
Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners that is
marked approved and is signed by a director with the IRS. Housing or parsonage income may be
considered qualifying income if there is documentation that the income 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.
Freddie Mac
For a newly hired transferred employee, purchasing a new primary residence under an employee
relocation program, a housing allowance may be considered as stable income without documented
evidence of 12 months receipt. Allowance must be likely to continue for three years.
COMMISSION INCOME
Commission income may fluctuate from year-to-year. For commission income requirements see
Variable Income section.
DISABILITY INCOME- LONG TERM
Disability benefit payments should be treated as acceptable income unless the terms of the disability
policy specifically limit the stability or continuity of the benefit payments. Benefits that have a defined
expiration date must have a remaining term of at least three years from the date of the mortgage
application in order to be used for qualifying the borrower. For example, if a borrower is receiving
disability benefits that are scheduled to be discontinued when he or she reaches a certain age and the
borrower will reach that age within three years of loan closing, the lender should not count the disability
benefit as stable income. When 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 lender must use the amount of the long-term payments in determining the borrower’s
stable income.
Generally, long-term disability will not have defined expiration date and must be expected to continue.
The requirement for re-evaluation of benefits is not considered a defined expiration date. Verification of
long term disability must be documented with one of the following:
• 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:
o The borrower’s current eligibility for the disability benefits, and
o The amount and frequency of the disability payments, and
o If there is contractually established termination or modification date
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Freddie Mac
• In addition to the copy of benefits as listed above, current receipt of disability must also be
verified. A bank statement must be provided if the benefit verification letter or pay statement
does not support current receipt.
• If the policy has a pre-determined expiration date (e.g. policies provided by employer and
private insurers), obtain a copy of the certificate of coverage, or other equivalent
documentation evidencing the policy term.
Social Security income for long term disability will not have defined expiration date and must be
expected to continue. See Social Security Income section for required documentation.
EMPLOYMENT CONTRACTS
Fannie Mae
When a borrower has an employment contract, but will not start prior to close, the income may be
used for qualifying provided all of the following requirements have been met:
Employment Contact- Fannie Mae
Subject Requirements
Eligible
employment and
income
Employment and income must meet the following requirements:
• Income must be from new primary employment
• Income must be fixed based income only
• The Borrower’s employer must not be a family member or an interested
party to the real estate or Mortgage transaction
Start date of the
new employment
• No earlier than 30 days prior to the note date or no later than 90 days after
the Note Date
• May be before or after the Delivery Date
Eligible loan
purpose
The Mortgage must be originated for one of the following purposes:
• Purchase transaction
Eligible Mortgaged
Premises The Mortgaged Premises must be a 1-unit Primary Residence
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Employment Contact- Fannie Mae
Subject Requirements
Verification of
additional funds
In addition to funds required to be paid by the Borrower and Borrower reserves, the
underwriter must verify additional funds in the Borrower’s depository and/or
securities account(s) with 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.
Resources include both financial reserves and current income.
o 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 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.
Required
documentation
The following documentation is required:
• Copy of the employment offer or employment contract for future
employment:
o Executed by the employer and accepted and signed by the
borrower
o Is non-contingent or provide documentation, such as a letter or emails from the employer verifying all contingencies have been
cleared, and
o Includes the terms of employment, including employment start date
along with type and rate of pay
• Documentation of additional funds, as required above
• If the start date is on or no more than 30 days prior to the note date a
verbal verification of employment is required that confirms active
employment status.
DU When the years and months on job in DU are 0 or blank, DU will issue a message
specifying the requirements specific to these transactions.
Special Feature
Code Special Feature 707 must be applied to the loan
Freddie Mac
For borrowers starting new employment or receiving a future salary increase from their current
employer, income commencing after the Note Date may be considered a stable source of qualifying
income, provided that all requirements for option one in the following table are met.
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Employment Contract- Freddie Mac
Subject Requirements
Eligible
employment and
income
Employment and income must meet the following requirements:
• Income must be from new primary employment or a future salary increase
with the current primary employer
• Income must be non-fluctuating and salaried (e.g., hourly earnings are not
permitted), and
• The Borrower’s employer must not be a family member or an interested
party to the real estate or Mortgage transaction
Start date of the
new employment or
future salary
increase, as
applicable
• Must be no later than 90 days after the Note Date
• May be before or after the Delivery Date
Eligible loan
purpose
The Mortgage must be originated for one of the following purposes:
• Purchase transaction
• Rate and Term
Eligible Mortgaged
Premises The Mortgaged Premises must be a 1-unit Primary Residence
Verification of
additional funds
In addition to funds required to be paid by the Borrower and Borrower reserves, the
underwriter must verify additional funds in the Borrower’s depository and/or
securities account(s) that equal no less than the sum of the monthly housing
expense (PITIA) and all other monthly liabilities multiplied by the number of months
between the Note Date and the start date of the new employment/future salary
increase, plus one additional month. A partial month is counted as one month for
the purpose of this calculation.
The amount of the required additional funds may be reduced by the amount of
verified gross income that any Borrower on the Mortgage is expected to receive
between the Note date and start date of the new employment, whether or not this
income is used to qualify for the Mortgage or is expected to continue after the start
date of the new employment/future salary increase.
Income used to reduce reserves but not qualify the borrower must follow standard
income documentation requirements (e.g., paystub, W2 and VVOE).
Example:
Borrower will start employment 60 days from Closing
Verified gross income that will be
received prior to future income $5000
PITIA + All other liabilities $6000
Additional Reserves
60 days plus 1 additional month $18,000 (PITIA + liabilities x 3)
Reduction in reserves $10,000 (income x 2)
Additional Reserved to be verified $8,000
Required
documentation
The following documentation is required:
• Copy of the employment offer letter, employment contract or other
evidence of the future salary increase from the current employer that:
o Is fully executed and accepted by the Borrower
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Employment Contract- Freddie Mac
Subject Requirements
o Is non-contingent or provide documentation, such as a letter or emails from the employer verifying all contingencies have been
cleared, and
o Includes the terms of employment, including employment start date
and annual income based on non-fluctuating earnings
• For a future salary increase provided by the Borrower’s current employer,
the above documentation must indicate that the increase is fully approved
and is explicitly granted to the Borrower
• A 10-day pre-closing verbal verification of employment verifying the terms
of the employment offer letter, contract or future salary increase have not
changed
• Documentation of additional funds, as required above
Special Feature
Code • Special Feature H57 must be applied to the loan
EMPLOYMENT-RELATED ASSETS AS QUALIFYING INCOME FOR FANNIE MAE (DU)
The following provides the requirements for employment-related assets that may be used as qualifying
income:
Loan Parameters for Employment-Related Assets –Fannie Mae
Parameter Transaction Requirements
AUS DU Approve/Eligible required
Maximum
LTV/CLTV/HCLTV
• 70%
• 80% when all asset owners are at least 62 at the time of the loan closing
Minimum Credit Score 620 credit score
Loan Purpose Purchase and limited cash-out refinance only
Occupancy Principal residence and second home only
Number of units As permitted by the occupancy type
Income
Calculation/Payout
Stream
Divide “Net Documented Assets” by amortization term of the mortgage loan (in
months).
Asset Parameters
Parameter Requirements
Asset Requirements
• Owned individually by the borrower, or the co-owner of the asset must also
be a co-borrower of the subject property
• Assets must be liquid and available to the borrower
Eligible Assets
• Non-self-employed severance package or non-self-employed lump sum
retirement package, i.e. a lump sum distribution, must be documented with
a distribution letter from the employer (1099R) and deposited to a verified
asset account; or
• 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
account if distribution is not already set up or the distribution amount is not
enough to qualify. The account and its composition must be documented
with the most recent monthly, quarterly, or annual statement.
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Loan Parameters for Employment-Related Assets –Fannie Mae
Parameter Transaction Requirements
Ineligible Assets
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).
Penalty
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.
Access to Funds
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 Assets
“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.
Calculation of Income
Example: Calculation of Net Document Assets
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 above.
$972.22/month
NON-EMPLOYMENT-RELATED ASSETS AS QUALIFYING INCOME FOR FANNIE MAE (DU)
When the borrower has liquid assets that are not employment-related, the assets may be used to
qualify the borrower if the following terms are met:
Loan Parameters for Non-Employment-Related Assets- Fannie Mae
Parameter Transaction Requirements
AUS DU Approve/Eligible required
Maximum
LTV/CLTV/HCLTV
• 80% for purchase and rate and term refinance
• 60% for cash out refinance
Minimum Credit Score • 680 ≤ 70% LTV
• 720 > 70% LTV
Occupancy Principal Residence and Second Homes
Number of Units
• 1-2 unit Principal Residence
• 1-unit Second home
• Manufactured Homes are ineligible
Reserves • Per the underwriting guidelines
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Loan Parameters for Non-Employment-Related Assets- Fannie Mae
Parameter Transaction Requirements
• The borrower’s minimum reserve requirements may not be satisfied using
any of the Other Financial Assets that are being converted into an income
stream.
Application • List as Other income of the application
Income
Calculation/Payout
Stream
Divide “Net Documented Assets” by term of mortgage
Special Feature Code SFC 579
Asset Parameters
Parameter Requirements
Asset Requirements
• Owned individually by the borrower, or the co-owner of the asset must also
be a co-borrower of the subject property
• Assets must be liquid and available to the borrower without penalty
Minimum Asset
Amount
• Purchase and Rate and Term Refinance:
o the lesser of one and one-half times the original UPB or $500,000
• Cash-Out Refinance:
o $500,000
Asset Seasoning
• Purchase and Rate and Term Refinance
o 12 months with minimum credit score of 720
o 24 months with credit score less than 720
• Cash-Out Refinance
o 24 months
Eligible Assets
• Checking and savings accounts;
• Investments in stocks, bonds, mutual funds, CD’s, money market funds,
and trust accounts; and
• Cash value of a vested life insurance policy
• Funds from the sale of investment properties
Ineligible Assets
• Assets that are ineligible as borrower’s reserves, which includes:
o Funds that have not been vested
o Funds that cannot be withdrawn under circumstances other than the
account owner’s retirement, employment termination, or death
o Stock held in an unlisted corporation
o Non-vested stock options and non-vested restricted stock
o Personal unsecured loans
o Cash proceeds from a cash-out refinance transaction on the subject
property
• Interest, dividends, and capital gains from Other Financial Assets (reported on
the borrower’s tax return) cannot be used as additional income.
Stocks, Bonds, 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.
Depository Accounts 100% of the value may be used to determine the income stream for demand
deposit, saving accounts and certificate of deposit accounts.
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Loan Parameters for Non-Employment-Related Assets- Fannie Mae
Parameter Transaction Requirements
Net Documented
Assets
“Net documented assets” are equal to the sum of eligible assets minus: (a) the sum
of the eligible documented Financial Assets minus any funds that will be used for
closing or required reserves (b) 30% of the remaining value of any stocks, bonds, or
mutual funds’ assets (after the calculation in (a)).
Calculation of Monthly
Income Stream
Calculation by Term of Mortgage
Accounts made up of stocks and mutual funds $1,000,000
Minus funds required for closing (down payment, closing
costs, reserves) (-) $150,000
a) Subtotal (=) $ 850,000
Minus 30% of $850,000 ($850,000 x .30) (-) $255,000
(b) Net Documented Assets (=) $ 595,000
Monthly income calculation ($595,000/360 (or applicable term
of loan in months)) See Income Calculation/Payout Stream in
table below.
$1652.77/month
ASSETS AS A BASIS FOR REPAYMENT OF OBLIGATIONS FREDDIE MAC (LPA)
Assets that will be used by the Borrower for the repayment of their monthly obligations may be used to
qualify the Borrower for the Mortgage, provided that the requirements listed below are met.:
Assets as a Basis for Repayment of Obligation- Freddie Mac
Parameter Transaction Requirements
AUS LPA Accept response
Maximum
LTV/CLTV/HCLTV 80%
Loan Purpose Purchase and limited cash-out refinance only
Occupancy Principal residence and second home only
Number of units 1-2 unit principal residence and 1-unit second home
Application Application should include information pertaining to the borrower’s employment and
income, even if the borrower qualifies solely based on assets
Income
Calculation/Payout
Stream
Divide “Net Documented Assets” by 240 months regardless of the loan term
Asset Parameters
Parameter Requirements
Ineligible Assets
The following must be subtracted from the eligible assets:
• Any funds required to complete the transaction (down payment, closing
costs, and reserves)
• Any gift funds and borrower funds, and
• Any portion of assets pledged as collateral for a loan or otherwise
encumbered
Eligible Assets Eligibility Documentation
Retirement Assets
• The retirement assets must be in a
retirement account recognized by the
Internal Revenue Service (IRS) (e.g.,
401(k), IRA)
• Borrower must be the sole owner
• Most recent retirement asset
account statement
• Documentation evidencing asset
eligibility requirements are met
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• The asset must not currently be used
as a source of income by the Borrower
• As of the Note Date, the Borrower
must
• have access to withdraw the funds in
their entirety, less any portion pledged
as collateral for a loan or otherwise
encumbered, without being subject to
a penalty or an additional early
distribution tax
• The Borrower’s rights to the funds in
the account must be fully vested
Lump-sum distribution
funds not deposited to
an eligible retirement
asset
If the lump-sum distribution funds have
been deposited to an eligible retirement
asset, follow the requirements for
retirement assets described above.
• Lump-sum distribution funds must be
derived from a retirement account
recognized by the IRS (e.g., 401(k),
IRA) and must be deposited to a
depository or non-retirement securities
account
• A Borrower must have been the
recipient of the lump-sum distribution
funds
• Parties not obligated on the Mortgage
may not have an ownership interest in
the account that holds the funds from
the lump-sum distribution
• The proceeds from the lump-sum
distribution must be immediately
accessible in their entirety
• The proceeds from the lump-sum
distribution must not have been or
currently be subject to a penalty or
early distribution tax
• Employer distribution letter(s)
and/or check-stub(s) evidencing
receipt and type of lump-sum
distribution funds; IRS 1099-R (if it
has been received)
• Satisfactorily documented
evidence of the following:
o Funds verified in the nonretirement account and used
for qualification must have
been derived from eligible
retirement assets
o Lump-sum distribution funds
must not have been or
currently be subject to a
penalty or early distribution
tax
Depository accounts
and Securities
• The Borrower must solely own assets
or, if asset is owned jointly, each asset
owner must be a Borrower on the
Mortgage and /or on the title to the
subject property
• At least one Borrower who is an
account owner must be at least 62
years old
• As of the Note Date, the Borrower
must have access to withdraw the
funds in their entirety, less any portion
pledged as collateral for a loan or
otherwise encumbered, without being
subject to a penalty
• Provide account statement(s)
covering a two-month period or a
direct account verification (i.e.,
VOD); or
• For securities only, if the Borrower
does not receive a stock/security
account statement
o Provide evidence the
security is owned by the
Borrower, and
o Verify value using stock
prices from a financial
publication or web site
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• Account funds must be located in a
United States- or State-regulated
financial institution and verified in U.S.
dollars
Documentation evidencing asset
eligibility requirements are met
Sourcing deposits:
• The underwriter must document
the source of funds for any deposit
exceeding 10% of the Borrower’s
total eligible assets in depository
accounts and securities, and verify
the deposit does not include gifts
or borrowed funds, or reduce the
eligible assets used to qualify the
Borrower by the amount of the
deposit
• When the source of funds can be
clearly identified from the deposit
information on the account
statement (e.g., direct payroll
deposits) or other documented
income or asset source in the
Mortgage file, the underwriter is
not required to obtain additional
documentation
Assets from the sale
of the Borrower’s
business
• The Borrower(s) must be the sole
owner(s) of the proceeds from the sale
of the business that were deposited to
the depository or non-retirement
securities account
• Parties not obligated on the Mortgage
may not have an ownership interest in
the account that holds the proceeds
from the sale of the Borrower’s
business
• The proceeds from the sale of the
business must be immediately
accessible in their entirety
• The sale of the business must not
have resulted in the following:
retention of business assets, existing
secured or unsecured debt, ownership
interest or seller-held notes to buyer of
business
• Most recent three months’
depository or securities account
statements
• Fully executed closing documents
evidencing final sale of business
to include sales price and net
proceeds
• Contract for sale of business
• Most recent business tax return
prior to sale of business
• Satisfactorily documented
evidence of the following:
o Funds verified in the nonretirement account and used
for qualification must have
been derived from the sale of
the Borrower’s business
FOREIGN INCOME
Foreign income is income that is earned from 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.
All income must be converted to US dollars based on the exchange rate at the time of underwriting for
qualifying purposes.
All written communication must be presented in English or translated to English by a certified translator.
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Foreign Income
Citizenship Residency Occupancy Verification Ineligible
US Citizen
Resident
Alien
(Green Card)
May live
abroad, but
must still
maintain a
present
address
within the
US.*
Subject to
underwriter’s
discretion
Copies of his or her signed
federal income tax returns
filed with the IRS for the past
two years that include foreign
income verified with a
4506-C.
Self-employed borrower who
earns the self-employment
income from a country other
than the United States and is
not reported on the reported
on Schedule C or Schedule
E of the borrowers 1040’s. Foreign earned pension
converted to U.S. currency.
Documentation to satisfy the
standard documentation
requirements.
Unlawful aliens not eligible.
NonPermanent
Resident
Alien (Visa)
Must
currently and
lawfully
reside in the
US
Subject to
underwriter’s
discretion
Copies of his or her signed
federal income tax returns
filed with the IRS for the past
two years that include foreign
income verified with a
4506-C.
Self-employed borrower who
earns the self-employment
income from a country other
than the United States.
Foreign earned pension
converted to U.S. currency.
Previously self-employed
borrowers are not eligible.
Documentation to satisfy the
standard documentation
requirements.
Unlawful aliens not eligible.
*An investment property address cannot be used to obtain the credit report and submit AUS
Refer to the Resident and Immigration Status section for additional eligibility requirements.
FOSTER CARE INCOME
Income received from a state or county-sponsored organization for providing temporary care for one or
more children may be considered stable income when the DU/LPA response requirements for length of
receipt and percentage of qualifying income are met.
Foster care income may be verified by:
• Letters from the organization providing the income,
• Copies of the borrower’s signed federal income tax returns that were filed with the IRS, or
• Copies of the borrower’s deposit slips or bank statements that confirm the regular deposits of
the payments.
INTEREST AND DIVIDENDS
Interest and dividend income may be used as acceptable stable income if it is properly documented
and has been received for the past two years and is expected to continue to be received for a minimum
of three years from the date of the mortgage application. An average of the income received for the
past two years must be used to qualifying the borrower. Copies of signed federal income tax returns
that were filed with the IRS or account statements may be used to verify this income.
Interest and dividend income may be used as acceptable stable income if it is properly documented
and ownership of the assets on which the interest and/or dividend income was earned is verified. Any
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assets used for down payment or closing costs must be subtracted from the borrower’s total assets
before calculating expected future interest or dividend income.
MORTGAGE DIFFERENTIAL PAYMENTS
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. These payments can
be considered as acceptable stable income if the borrower’s employer verifies its subsidy in writing
stating the amount and duration of the payments. The payments must continue for at least three years
from the date of the mortgage application. The differential payments should be added to the borrower’s
gross income when calculating the qualifying ratio. They cannot be used to offset directly the mortgage
payment, even if the employer pays them to the mortgage lender rather than to the borrower.
MILITARY INCOME
Military personnel may be entitled to different types of pay in addition to their base pay. The following
may be considered stable income provided there is documentation verifying the income will continue for
at least three years:
• Flight pay
• Hazardous duty pay
• Rations
• Clothing allowance (usually paid yearly)
• Housing allowances
Education benefits may not be used to calculate qualifying income.
Obtain a copy of the borrower’s last Leave and Earnings Statement (LES) to verify allotments,
allowances, estimated time in service, and the amount of net and gross pay. Also, obtain and verify the
following information from the borrower’s latest Leave and Earnings Statement (LES):
• Military rank
• Social Security Number
• Military address
• Length of active service to date
The tax-free income from housing (BAQ), rations, uniforms, food, flight pay, etc. can be used as income
to qualify for the loan. Grossing up of this income is subject to standard. The LES statement must show
at least 12 months remaining for time in servicing, otherwise the tax-free income cannot be used to
qualify for the loan. As long as there is at least 12 months remaining before the borrower’s “out date”
(as verified on the LES), a verbal verification of employment is not needed.
MORTGAGE CREDIT CERTIFICATES
States and other political subdivisions can issue mortgage credit certificates (MCCs) in place of or as
part of, their authority to issue mortgage revenue bonds. Mortgage credit certificates enable an eligible
first-time homebuyer to obtain from a lender a market-rate mortgage that will be 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. The borrower is permitted to reduce the withholding on his or her
wages by the full amount of the tax credit to ensure that he or she will have an adequate cash flow and
the ability to make the periodic mortgage payments.
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When calculating the borrower’s debt-to-income ratio, the underwriter should treat the maximum
possible mortgage credit certificate income available to the borrower as an addition to the borrower’s
income, rather than as a reduction to the amount of the borrower’s mortgage payment. The amount that
is added to the borrower’s monthly income would be calculated as follows:
(Mortgage Amount) x (Note Rate) x (MCC%) / 12
Broker and Correspondent loans utilizing an MCC cannot close in Flagstar Bank’s name.
NOTES RECEIVABLE
In order to use payments on notes receivable income the following requirements must be met:
• A copy of the Note to establish the amount and length of payment
• Must have a three-year continuance from the date of application
• Evidence the funds have been received for the past 12 months with one of the following:
o Deposit slips, tax returns or copies of the borrower’s bank statements that show
consistent deposits of these funds.
OVERTIME INCOME
For additional employment income requirements pertaining to overtime see Variable Income section.
PROFESSIONAL GAMBLER
When the borrower has income derived from gambling the following requirements must be in order to
use for qualifying:
• The income must be reported as self-employed; and
• Two years tax returns must be provided to document income has not declined
PUBLIC ASSISTANCE
Income from public assistance may be considered as acceptable stable income if it is expected to
continue to be received for at least three years from the date of the mortgage application. Public
assistance income should be documented by letters or exhibits form the paying agency that state the
amount, frequency, and duration of the benefit payments.
Monthly Section 8 voucher payments also are an acceptable source of qualifying income. There is no
requirement, however, 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 prior
to the date of the mortgage application or for the payments to continue for any period of time form the
date of the mortgage application. Verification must be obtained from the public agency that issued the
voucher to the borrower of the monthly payment amount and that the income is non-taxable.
RENTAL INCOME
Calculating Monthly Net Rental Income or Loss
When the subject property will be rented and is a 1-4 unit investment property or 2-4 unit principal
residence, you must calculate rental income as follows if the borrower is not being qualified with the
full PITI payment:
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Rental Income From the Security Property
Does Borrower
Have History of
Receiving Rental
Income From
Property?
Documentation Requirements Calculate Monthly Net
Rental Income (or Loss)
Yes
Document the rental cash flow by obtaining a copy of
the most recent year filed tax return, pages 1 and 2
and Schedule E.
A signed lease may be used if the property was out of
service during any period of the prior year due to
renovations as supported by schedule E reflecting
repair costs and reduced number of days in use.
Documentation is required to ensure the expenses
support a significant renovation to support time the
property was out of service.
See Appraisal Addendum requirements for investment
and 2-4 unit properties-subject property for additional
requirements
Analyze the borrower’s cash
flow and calculate the net
rental income (or loss) per
month from the returns; or
75% of the gross rent from
the lease agreement, with the
remaining 25% being
absorbed by vacancy losses
and ongoing maintenance
expenses. if allowable
Freddie Mac
• Use lesser of Schedule E
or lease agreement
versus market rent as
indicated on form 1000. If
higher income is needed
a written analysis for
discrepancy and
justification for use to
qualify the borrower as
stable and reasonably
expected to continue
must be provided.
No
Purchase
For a purchase transaction of an investment property
the following must be met in order for the borrower to
use rental income to qualify:
• Copy of the fully executed lease agreement
• If the property is not currently rented, lease
agreements are not required, and market rent
supported by Form 1007/1000 or form 1025/72,
as applicable, may be used to qualify the
borrower; and
• Meet the minimum reserve requirement based on
investor type
Fannie Mae
When the borrower is purchasing a 2-4 unit principal
residence or a 1-4 unit investment property:
• If the borrower currently owns a primary residence
(or has a current housing expense) and at least 1
year property management experience, there is
no restriction to the amount of rental income used
to qualify
The gross rental income from
the property is equal to the
lesser of the market rent
established by the appraiser
or the current rent based on
the existing lease
agreement(s). Net rental
income equals 75% of the
gross rent; the remaining 25%
of the gross rent is absorbed
by vacancy losses and
ongoing maintenance
expenses.
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Rental Income From the Security Property
Does Borrower
Have History of
Receiving Rental
Income From
Property?
Documentation Requirements Calculate Monthly Net
Rental Income (or Loss)
• If the borrower currently owns a primary residence
(or has a current housing expense) and has less
than 1 year property management experience, the
rental income may only offset the PITIA of the
subject
• If the borrower does not own a principal residence
and does not have a current housing expense,
rental income for the subject may not be used,
regardless of history of receiving rent or property
management.
Freddie Mac
• Borrower must own a Principal Residence to use
rental income to qualify when purchasing a new
rental property in the current calendar year
• Rental income may only be used to offset the
PITIA of a new investment subject property and
no positive rental income may be used to qualify
unless the borrower has a minimum of one-year
investment property management experience
• Leases must be current with a minimum term of
one year. If the lease is assigned from the seller
and is in the automatically renewable month-tomonth phase of an original one year term lease,
then a month-to-month term is acceptable
See Appraisal Addendum requirements for
investment and 2-4 unit properties-subject
property for additional requirements
Refinance
Leases can only be used if a property is not listed on
Schedule E because it was acquired subsequent to
filing the tax return.
Fannie Mae
When the borrower is refinancing a 2-4 unit principal
residence or a 1-4 unit investment property:
• If the borrower currently owns a primary residence
(or has a current housing expense) and at least 1
year property management experience, there is
no restriction to the amount of rental income used
to qualify
• If the borrower currently owns a primary residence
(or has a current housing expense) and has less
than 1 year property management experience, the
rental income may only offset the PITIA of the
subject
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Rental Income From the Security Property
Does Borrower
Have History of
Receiving Rental
Income From
Property?
Documentation Requirements Calculate Monthly Net
Rental Income (or Loss)
• If the borrower does not own a principal residence
and does not have a current housing expense,
rental income for the subject may not be used,
regardless of history of receiving rent or property
management.
See Appraisal Addendum requirements for investment
and 2-4 unit properties-subject property for additional
requirements
When the borrower owns additional property that is rented, calculate the monthly net rental income
(or loss) in accordance with the following table:
Rental Income From Property Other Than the Security Property
Does Borrower
Have History of
Receiving Rental
Income From
Property?
Documentation Requirements Calculating Monthly Net
Rental Income (or Loss)
Yes
Obtain copies of the borrower’s most recent year
signed federal income tax returns and the related
Schedule E, or a copy of the current lease
agreement(s) (only if a property is not listed on
Schedule E because it was acquired subsequent to
filing the tax return).
A signed lease may be used if the property was out of
service during any period of the prior year due to
renovations as supported by schedule E reflecting
repair costs and reduced number of days in use.
Documentation is required to ensure the expenses
support a significant renovation to support time the
property was out of service.
Freddie Mac
In addition to a lease agreement one of the following
must be provided:
• Form 1000 or 72 to support income from lease
due to property being out of service during the
prior year; OR
• Documentation (e.g. cancelled checks, bank
statements showing deposits or electronic
transfers) supporting no less than two months
receipt of rental income.
Analyze the borrower’s cash
flow and calculate the net
rental income (or loss) per
month from the returns; or
75% of the gross rent from
the lease agreement, with
the remaining 25% being
absorbed by vacancy losses
and ongoing maintenance
expenses. if allowable
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Rental Income From Property Other Than the Security Property
Does Borrower
Have History of
Receiving Rental
Income From
Property?
Documentation Requirements Calculating Monthly Net
Rental Income (or Loss)
No
Obtain copies of current lease agreements only if a
property is not listed on Schedule E because it was
acquired subsequent to filing the tax return or
conversion of current departing principal residence to
an investment.
Freddie Mac
In addition to a lease agreement one of the following
must be provided:
• Form 1000 or 72 to support income from lease
due to property being out of service during the
prior year; OR
• Documentation (e.g. cancelled checks, bank
statements showing deposits or electronic
transfers) supporting no less than two months
receipt of rental income.
Net rental income is 75% of
the gross rent from the lease
agreements, with the
remaining 25% being
absorbed by vacancy losses
and ongoing maintenance
expenses.
For conversion of a primary
residence to an investment,
rental income may only be
used to offset the PITIA of
the primary property and no
positive rental income may
be used to qualify unless the
borrower has a minimum of
one-year investment
property management
experience
Property Management Experience Verification
An established history of property management may be obtained by one of the following:
• The borrower’s most recent signed tax returns, including schedules 1 and E. Schedule E
should reflect rental income received for any property and the Fair Rental Days of 365
• If the property has been owned for at least one year, but there is less than 365 Fair Rental
Days on the Schedule E, a current signed lease may be used to supplement the tax returns;
• A current signed lease may be used to supplement tax returns if the property was out of
service for any reason for the prior year. Schedule E must support this by reflecting a
reduced number of days in use and related repairs
• If borrower has less than one year of property management, a signed lease agreement may
be provided along with confirmation that the rental was acquired subsequent to the last tax
filing year.
Treatment of the Income (or Expense)
The amount of monthly net rental income (or loss) that is considered as part of the borrower’s total
monthly income (or expenses) and its treatment in the calculation of the borrower’s total debt-toincome ratio will vary depending on whether the borrower occupies the rental property as his or her
principal residence.
If the net rental income (or loss) relates to the borrower’s principal residence:
• The monthly net rental income (as defined above) must be added to the borrower’s total
monthly income.
• Any net rental loss must be added to the borrower’s total monthly obligations.
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• The full amount of the mortgage payment (PITIA) must be included in the borrower’s total
monthly obligations when calculating the debt-to-income ratio.
If the net rental (or loss) relates to a property other than the borrower’s principal residence:
• The monthly net rental income (as defined above, but excluding the full amount of the
related mortgage payment) must be added to the borrower’s total monthly income.
• Any monthly net rental loss must be added to the borrower’s total monthly obligations.
• The full PITIA for the rental property is factored into the amount of the net rental income (or
loss), therefore, it should not be counted as a monthly obligation.
• The full PITIA for the borrower’s principal residence must be counted as a monthly
obligation.
When Schedule E is used to calculate rental income, the full PITIA must be accounted for. Any
listed depreciation, interest, taxes, insurance, or HOA expenses will be added back to the
borrower’s cash flow. Refer to the Fannie Mae Cash Flow Analysis Form 1084 dated 10/2001 or the
Freddie Mac Income Analysis Form 91 dated 4/2010.
When the borrower is using rental income to qualify for the mortgage the entire PITIA of the
property must be considered when evaluating property cash flow regardless of the obligated party.
Rental Property Reported Through a Partnership or an S Corporation
When a borrower is personally obligated on a mortgage debt with the gross rents and related
expenses reporting through a Partnership (1065) or S Corporation (1120s) the following
requirements must be met to offset the borrower’ obligation:
• Property must be disclosed in the real estate section of the application,
• Form 8825 from the business returns is used to calculate the rental net cash flow of the
property to offset the borrower’s obligation, up to but not to exceed the PITIA
• Standard analysis of the business returns is required to determine any applicable income or
loss. See Self-Employed Borrowers section for additional requirements.
TEMPORARY RENTAL INCOME REQUIREMENTS FOR APPLICATIONS ON OR AFTER JULY 20,
2020
The following temporary documentation is required, in addition to the standard Conventional
Underwriting Guideline requirements listed above, for all properties utilizing rental income.
Documentation requirements
• A copy of the current long-term lease agreement must be provided along with two months
receipt of the rental income
o Receipt of rental income must be dated within 60 days of the Note date
o The rent received must fully support the amount on the lease or rental income may
not be utilized
o If the current lease is less than the historic amount on the tax returns, the lesser
income per the lease agreement will be used at 75% of the lease.
o If the current lease is higher than the historic amount of the tax returns, the income
per the tax returns must be used for qualification.
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o For investment purchases, 2-4 unit owner occupied purchases, and conversion of a
primary residence to a rental property, a new lease or leases may be executed with a
minimum receipt of the security deposit and first month rent paid in lieu of the two
months historic receipt of rent.
o An expired long-term lease agreement (one which automatically converts to a monthto-month lease) is acceptable when the source of receipt of rent matches the tenant
name on the lease.
• When a rental property operates as a short-term rental (vacation rental or Airbnb without a
long-term lease) income may only be utilized when the borrower can document receipt of
income for the last 2 months at the historical level as documented by the most recent filed
tax returns. For owner-occupied transactions in which the borrower is using short-term rent
from other real estate owned, the borrower is required to have an additional 2 months
reserves for every short-term rental above and beyond the funds to close and reserves
required by DU/LPA.
o Receipt of income must be dated within 60 days of the Note date
o Rental income may not be utilized unless the borrower has a historic of receipt of
income as a vacation rental
RESTRICTED STOCK (RS) AND RESTRICTED STOCK UNITS (RSU) – FREDDIE MAC ONLY
Employers increasingly include RS and RSU as a component of employee compensation. RS are
grants of company shares which represent equity interest in the company. RSU are grants valued in
terms of company shares that do not represent equity interest in the company. Both RS and RSU are
subject to a restriction period during which recipients are not permitted access to granted shares until
vesting requirements are met. Vesting requirements are based on varying criteria but the most common
types are:
• Performance-based (e.g., a certain percentage of total granted shares vest based on individual
or corporate performance)
• Time-based (e.g., a certain percentage of total granted shares vest after a pre-determined
period of employment)
DOCUMENTATION REQUIREMENTS
RS and RSU may be used to qualify the Borrower for the Mortgage, provided the following
requirements have been met:
Income Type Stable Monthly Income
Requirements Documentation Requirements
RS and RSU subject to
performance-based vesting
provisions
History of receipt:
• Two years, consecutive
• To be considered for history
of receipt, RS and RSU used
for qualifying must have
vested and been distributed
to the Borrower from their
current employer, without
restriction
Continuance: Must be likely to
continue for at least the next
three years. The underwriter is
All of the following:
• YTD paystub(s) documenting
all YTD earnings, including
payout(s) of RS or RSU, W-2
forms for the most recent two
calendar years and a 10-day
prior to close verbal
verification of employment.
Income verification obtained
through a third-party
verification service provider is
not permitted.
Or all of the following:
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Income Type Stable Monthly Income
Requirements Documentation Requirements
not required to obtain
documentation to verify income
continuance, absent any
knowledge, information or
documentation that the income is
no longer being received or is
likely to cease.
• Written verification of
employment (form 1005)
documenting all YTD
earnings (including payout(s)
of RS or RSU) as well as
earnings for the most recent
two calendar years, and a 10-
day prior to close verbal
verification of employment.
Employment and income
verifications obtained through
a third-party verification
service provider are
permitted, providing that the
documentation clearly
identifies and distinguishes
the payout(s) of RS/RSU.
Additional documentation
requirements applicable to all
documentation levels:
• Evidence the stock is publicly
traded; and
• Documentation verifying that
the vesting provisions are
performance-based (e.g.RS
and/or RSU agreement, offer
letter); and
Vesting schedule(s) currently
in effect detailing past and
future vesting; and
• Evidence of receipt of
previous year(s) payout(s) of
RS/RSU (e.g., year-end
paystub, employer-provided
statement paired with a
brokerage or bank statement
showing transfer of shares or
funds) that must, at a
minimum, includes the
number of vested shares or
its cash equivalent distributed
to the Borrower (pre-tax)
CALCULATION
Subject Requirement and Guidance
RS and RSU subject to performance-based
vesting provisions
Based on the form in which vested RS or RSU are
distributed to the borrower (i.e., as shares or its cash
equivalent), the seller must use the applicable
method(s) below to calculate the monthly income:
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Subject Requirement and Guidance
RS or RSU distributed as shares
Multiply the 52-week average stock price as of the
application received date by the total number of
vested shares distributed (pre-tax) to the borrower in
the past two years, then divide by 24.
(e.g., if 200 vested shares were distributed (pre-tax) in
the past two years and the 52-week average stock
price as of the application received date is $10,
multiply 200 x $10 then divide by 24= $83.33 monthly
income)
RS or RSU distributed as cash equivalent
Use the total dollar amount distributed (pre-tax) from
the cash equivalent of vested shares in the past two
years and divide by 24.
Refer below for more information about fluctuating
earnings
RS and RSU subject to time-based vesting
provisions
Based on the form in which vested RS or RSU are
distributed to the Borrower (i.e., as shares or its cash
equivalent), the Seller must use the applicable
method(s) below to calculate the monthly income:
RS or RSU distributed as shares
Multiply the 52-week average stock price as of the
Application Received Date by the number of vested
shares distributed (pre-tax) to the Borrower in the past
year, then divide by 12.
(e.g., if 50 vested shares were distributed (pre-tax) in
the past year and the 52-week average stock price as
of the Application Received Date is $10, multiply 50 x
$10 then divide by 12 =$41.67 monthly income)
RS or RSU distributed as cash equivalent
Use the total dollar amount distributed (pre-tax) from
the cash equivalent of vested shares in the past year
and divide by 12.
Refer below for more information about fluctuating
earnings.
ANALYSIS OF INCOME FLUCTUATION AND STABILITY
The determination of stability for RS and RSU income used to qualify must include analysis of
changes in the company’s stock price as well as past and future distributions detailed in a vesting
schedule. If the YTD earnings are consistent with the previous year(s) earnings or trending upward,
then the underwriter must use the applicable calculation method(s) below to determine the monthly
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income. If the earnings are not consistent (i.e., the value of vested shares distributed decreases
substantially year-over-year), additional analysis is required and additional documentation may be
necessary to determine income stability and develop an accurate calculation of qualifying income.
ELIGIBLE ASSET
Stock with limitations on its accessibility (e.g., restricted stock which has not vested and been
distributed to the recipient) is not eligible source of borrower funds and may not be used reserves
and/or closing costs.
RETIREMENT, GOVERNMENT, AND PENSION INCOME
All retirement income must be likely to continue for at least the next three years.
Document regular and continued receipt of the income as verified by one of the following:
• Letters from the organizations providing the income
• Copies of the retirement award letters
• Copies of the signed federal income tax returns
• IRS W-2 or 1099 forms
• Proof of current receipt
• Copy of a financial or bank account statement
Newly Established Retirement Income from government annuity or pension:
• Document the finalized terms of the newly established income including, but not limited to, the
source, type, effective date of income commencement, payment frequency, and pre-determined
payment amount with the benefit verification letter, notice of award letter or other equivalent
documentation from the payer that provides and establishes these terms.
• The income must commence prior to or on the first Mortgage payment due date.
• Documentation must be dated no more than 120 days prior to the Note Date
• Verification of current receipt is not required
Fannie Mae
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
o Eligible retirement balances from multiple accounts may be combined for the
purposes of determining whether the three-year continuance is met
• Must document current receipt of income as verified with one the options listed above
• The borrower must have unrestricted access without penalty to the accounts
Freddie Mac
Distributions from retirement accounts recognized by the IRS (e.g. 401(k), IRA):
• May not be subject to penalty (e.g. early withdrawal penalty):
• Evidence of the income source, type, distribution frequency, distribution amount(s), current
receipt (as applicable), and history of receipt (as applicable) must be documented as
follows:
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o Copy of retirement account statement, financial institution holding retirement account
that verifies regular scheduled distribution arrangements, 1099(s) or equivalent
documentation;
o Copy of bank statement of equivalent document evidencing current receipt. If the
retirement distributions are not scheduled monthly payments, e.g., annual, semiannual, quarterly, the most recent distribution verified through a retirement account
statement, 1099, and/or other equivalent documentation, as applicable, is sufficient
in lieu of current receipt; and
o Evidence of sufficient assets to support the qualifying income with three-year
continuance.
Eligible retirement balances from multiple accounts may be combined for the
purposes of determining whether the three-year continuance from the Note
date is met.
• If distributions are being taken in accordance with certain IRS rules, such as the Required
Minimum Distributions (RMD) rule (i.e. excise tax penalty applies if distributions are not
taken), and evidence of current receipt of the required minimum distribution amount is
obtained, history of receipt is not required for the income to be considered stable.
• Due to the multiple variables inherent with distributions from retirement accounts including
but not limited to, fixed and fluctuating income amounts, the history of receipt necessary to
justify a stable monthly qualifying income amount may vary. This may include a range of
history from zero to 24 months, depending upon the individual circumstances. As with all
income, the underwriter must determine that the source and amount of the income are
stable. Factors that the underwriter must consider when determining that the income used to
qualify the borrower is stable, and when determining the history of receipt necessary to
justify a stable monthly qualifying income amount include, but are not limited to the
following:
o Frequency and regularity of the distributions
o Length of time the distributions have been taken and whether or not they establish a
stable pattern of receipt over a given period of time. For example, consider whether
or not the distributions are fixed amounts occurring with regular frequency or are
fluctuating amounts occurring with or without regular frequency. For fixed amounts
occurring with regular frequency, a lesser history of receipt may be needed in order
to determine the amount and stability of the qualifying income than would be needed
for fluctuating amounts. For fluctuating amounts, it may be necessary to obtain a
longer history of receipt in order to determine the amount and stability of the
qualifying income while taking into consideration whether or not the overall payments
are similar when viewed year over year or with another similar measure, such as
quarter over quarter.
o Rules governing distributions, e.g., IRS rules governing exceptions to early
withdrawal penalties and Required Minimum Distributions (RMD), employer
retirement plan rules, and designs governing scheduled distribution terms. Certain
rules may provide support for the frequency and regularity of receipt as well as
continued receipt, thereby enabling a lesser amount of history to justify a stable
monthly qualifying income amount.
• A written rationale explaining the analysis used to determine that qualifying income must be
provided, regardless of the underwriting path.
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ROYALTY PAYMENTS
If the borrower needs to rely on income from royalty payments to qualify for the mortgage, the following
documentation must be provided:
• Royalty contact, 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.
Documented evidence showing that the borrower has received royalty payments for at least 12 months
and will continue to receive them for at least three years after the date of the mortgage application is
required in order to use the payments as qualifying income.
SEASONAL JOB INCOME
Seasonal income, including seasonal unemployment compensation, is considered stable for qualifying
use when the borrower has a two-year history of receipt of seasonal employment (e.g. outdoor
laborers, landscapers, construction workers, supplemental department store works during holiday
periods, etc.). Seasonal unemployment compensation should not be used to qualify the borrower
unless it is appropriately documented, clearly associated with seasonal layoffs, expected to recur, and
reported on the borrower’s federal income tax returns.
SECONDARY EMPLOYMENT INCOME
Secondary employment or multiple-job income is generally considered stable income for qualifying use
when received and documented for the last two-years.
• There is flexibility of accepting less than a two-year history, but no less than a 12-month history
for a borrower if there is a strong likelihood that the borrower will continue to receive that income
and there are positive factors to offset the shorter income history
• It should be determined if there has been any recent change in the borrower’s overall
employment status that might jeopardize the continuance of income from the second job. For
example, review of borrower’s historic ability to handle multiple jobs on a continuing basis.
• For part-time income or income from multiple-jobs, refer to Variable Income section for
additional eligibility requirements.
• Fannie Mae (DU)- There can be no gap in employment beyond one-month in the most recent
12-month period.
SELF-EMPLOYED BORROWERS
For all self-employed borrowers, a self-employed borrower income analysis worksheet should be
submitted with the file.
The following factors must be analyzed before approving a mortgage for a self-employed borrower:
• The stability of the borrower’s income
• The location and nature of the borrower’s business
• The demand for the product or service offered by the business
• The financial strength of the business
• The ability of the business to continue generating and distributing sufficient income to enable
the borrower to make the payments on the requested mortgage.
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Income or Loss Reported on Schedule K-1 (IRS Forms 1065 or 1120S)
Business income reported on Schedule K-1 may be used to qualify only when the borrower has a
documented history of receiving cash distributions of income from the business consistent with the
level of business income being used to qualify.
Caution must be used when including income that the borrower draws from the borrower’s
partnership or S corporation as qualifying income. Ordinary income, net rental real estate income,
and other net rental income reported on Schedule K-1 may be included in the borrower’s cash flow
provided:
• The borrower can document ownership share (may use Schedule K-1), and
• The business has adequate liquidity (e.g. working capital) to support the withdrawal of
earnings. A written evaluation of the business income must be retained in the mortgage file.
If… Then…
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,
No further documentation of access to the income or
adequate business liquidity is required. The Schedule K1 income may then be included in the borrower’s cash
flow.
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,
The lender must confirm the following to include the
income in the borrower’s cash flow:
o The business has adequate liquidity (working
capital) to support the withdrawal of
earnings.
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
Business tax returns are required, The underwriter must consider the type of business
structure and analyze the business returns
Documentation Requirements
The following describes the documentation that the borrower must provide:
• The most recent two years of signed individual federal income tax returns IRS Form 1040;
(or the most recent one year of signed individual federal income tax returns, if permitted)
• The most recent two years of IRS Schedule K-1; (or the most recent year IRS Schedule K-1,
if permitted)
• The most recent two years of business federal income tax returns (IRS Form 1065 or IRS
Form 1120S), unless the requirements to waive business tax returns have been met; (or the
most recent one year of business federal income tax returns, if permitted)
Freddie Mac
It is required to document the number of years the same business has been in operation to
determine the number of year returns required. It is not acceptable to utilize a borrower’s length of
time within the same self-employment field to justify the use of reduced documentation. For
partnerships, S corporations and corporations, the federal income tax return(s) for the business
must indicated the number of years that the business has been in existence. For sole
proprietorships, the federal individual income tax return(s) and any other documentation or
information received must not contradict the number of years that the business has been in
existence as documented on the mortgage application.
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• One year personal and business returns are required if the borrower has had ownership
interest of 25% or more in the same operating business for five or more years.
• Two years personal and business returned are required if the business is operating less
than five years.
• A change in business structure (i.e. Schedule C to 1065) does not trigger newly selfemployed and documentation must be retained in file to support.
ANALYZING PARTNERSHIP RETURNS FOR A PARTNERSHIP, LLC, AND S CORPORATION
Evaluating the Business Income for a Partnership and LLC
When the borrower has 25% or more ownership interest in the business and business tax returns
are required, the underwriter must perform a business cash flow analysis and evaluate the overall
financial position of the borrower’s business to determine whether:
• Income is stable and consistent, and
• Sales and earnings trends are positive.
If the business does not meet these standards listed above, business income cannot be used to
qualify the borrower.
Evaluating the business income for a S Corporation
When the borrower has 25% or more ownership interest in the business, the underwriter must
perform a business cash flow analysis in order to evaluate the overall financial position of the
business and confirm:
• The business income is stable and consistent, and
• Sales and earnings trends are positive.
If the business does not meet these standards listed above, business income cannot be used to
qualify the borrower.
Borrower’s Proportionate Share of Income or Loss for a Partnership and LLC
The borrower’s proportionate share of income or loss is based on the borrower’s partnership
percentage of Ending Capital in the business as shown on the IRS Form 1065, Schedule K-1. Only
the borrower’s proportionate share of the business income or loss after making the adjustment to
the business cash flow can be used when qualifying the borrower for the mortgage loan.
Borrower’s Proportionate Share of Income or Loss for an S Corporation
The borrower’s proportionate share of income or loss is based on the borrower’s (shareholder)
percentage of stock ownership in the business for the tax year as shown on IRS Form 1120S,
Schedule K-1. The cash flow analysis should consider only borrower’s proportionate share of the
business income (or loss), taking into account any adjustments to the business income that are
discussed below. Business income may only be used to qualify the borrower if the lender obtains
documentation verifying that
• The borrower has ownership of the income (Schedule K-1 may be used to document
ownership share), and
Alternatively, the lender can obtain documentation verifying that:
• The business has adequate liquidity (e.g. working capital) to support the withdrawal of
earnings. A written evaluation of the business income must be retained in the mortgage file.
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Earnings from a Corporation (1120)
Fannie Mae
Can only be taken into consideration if the borrower owns 100% of the business.
Freddie Mac
It is only required to document access to business income if the borrower is less than 100%
owner of the business (i.e. 1120) and the income is not reporting on the borrower’s personal tax
returns.
Adjustments to Business Cash Flow for Partnership, LLC and S Corporation
Items that can be added back to the business cash flow include depreciation, depletion,
amortization, casualty losses, and other losses that are not consistent and recurring. The following
items should be subtracted from the business cash flow:
• Meals and entertainment exclusion,
• Other reported income that is not consistent and recurring, and
• The total amount of obligations on mortgages or notes that are payable in less than one
year.
These adjustments are not required for lines of credit or if there is evidence that these obligations
roll over regularly and/or the business has sufficient liquid assets to cover them.
Income from Partnerships, LLCs, Estates, and Trusts
Income from partnerships, LLCs, estates, or trusts can only be considered if the lender obtains
documentation verifying that:
• The borrower has ownership of the income (Schedule K-1 may be used to document
ownership share)
• The income was actually distributed to the borrower.
Alternatively, the lender can obtain documentation verifying that:
• The borrower has access to the income through a partnership agreement, LLC operating
agreement, or other documentation that the lender determines is appropriate, unless the
borrower(s) own 100% of the business in which case confirmation of access to the income is
not required
• The business has adequate liquidity (e.g. working capital) to support the withdrawal of
earnings. A written evaluation of the business income must be retained in the mortgage file.
Ownership in the Business <25%
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 borrower can document ownership share (may use Schedule K-1),
• The borrower can document access to the income, and
• The business has adequate liquidity (e.g. working capital) to support the withdrawal of
earnings. A written evaluation of the business income must be retained in the mortgage file.
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If… Then…
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,
No further documentation of access to the income or
adequate business liquidity is required. The Schedule K1 income may then be included in the borrower’s cash
flow.
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,
The lender must confirm the following to include the
income in the borrower’s cash flow:
• The borrower can document access to the income
(such as a partnership agreement or corporate
resolution).; and
• The business has adequate liquidity (working
capital) to support the withdrawal of earnings.
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
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 upon 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.
Documentation Requirements
For Schedule K-1 documentation requirements, 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. If the K1 does not reflect a documented stable history of receiving cash distributions
of income, two years business returns will be required to demonstrate the business has adequate
liquidity (e.g. working capital) to support the withdrawal of earnings.
TEMPORARY SELF-EMPLOYMENT REQUIREMENTS FOR APPLICATIONS ON OR AFTER JUNE
11, 2020
The following temporary requirements will be required for income derived from self-employment in
order to determine if the borrower’s income is stable and there is a reasonable expectation of
continuance due to the impact of COVID-19.
For applications on or after December 14, 2020 the mandatory number of bank statements required is
being increased. The revised requirement may be applied to loans with applications prior to the
effective date:
Documentation Requirements
In addition to the standard tax return requirements, one of the following documentation options must
be provided:
Documentation Options Minimum Requirements
Unaudited Profit and Loss
and
Business Bank Statements
• The Profit and Loss statement:
o Must be signed by the borrower
o Business revenue, expenses and net income must be current up
to and including the most recent month preceding the application
o Must be no older than 60 days from the Note date
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Documentation Options Minimum Requirements
• Business asset statements:
o A Minimum of three months business statements (For applications
prior to 12/14: two months only required)
o Dated no older than the last three months represented on the YTD
P&L (e.g. P&L is through May 31st, the account statements can be
no older than March, April and May)
o Statements must be reasonably consistent with the information on
the P&L to support the level of business revenue reported. (Prior
to 12/14: use of two months statements comparison of revenue
and expenses to support P&L)
Audited P&L
• The Profit and Loss statement:
o Prepared by a CPA
o Business revenue, expenses and net income must be current up
to and including the most recent month preceding the application
o Must be no older than 60 days from the Note date
Additional documentation may be requested to supplement the minimum requirements if the
business account statements are not reasonably consistent with the YTD P&L (e.g. month-to-month
or quarterly trending for the YTD P&L, additional bank statements, etc.). If an unaudited P&L cannot
be supported by the documentation provided, the income is not eligible for use in qualifying.
Business Income for Qualification
The lesser income as determined by the most recently filed tax returns (years required based on
standard underwriting guidelines) versus the income calculated using the year-to-date profit and
loss statement must be used for qualification.
• The P&L may not be used for qualification at a higher level than last reported on the most
recently filed tax returns
• When using the income from the P&L the declining income must be considered stabilized.
Note: If an updated P&L is required after the application date, prior to the Note date, the
income may not be used for qualification when the updated P&L shows additional decline as
would not support the income has stabilized.
Business Review and Analysis
When there has been a change in business operations, temporary or long-term, the business
operations must be stabilized to verify the ongoing receipt at the current level as determined by the
profit and loss statement and business accounts, when applicable. A written analysis must be
retained in file to support the stability of the business.
In some instances supplemental documentation may be required in relation to pandemic-related
factors which may include, but not limited to, the following:
Analysis Requirements
Business
Operations
• Has the business been able to operate at full capacity or has the business
operations been modified to support continued revenue?
• Is the business continuing to operate in the current location or an alternate
location suitable for business operations?
• Is there a demand for the product or service currently offered by the business?
• Is the business operation and/or revenue temporarily restricted due to state
shelter in place?
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Analysis Requirements
• Is the impact to the business operations negligible due to the nature of the
business? For example, income is seasonal apart from the event timeline.
Additional documentation may include an updated business plan, business receipts,
or written explanation from the business owner.
Business
Stability
• Does the profit and loss identify a significant imbalance between expenses and
revenue that may impact financial stability? Or have modifications to current
business operations been made to correct this imbalance?
• Do prior year business tax returns demonstrate ample financial liquidity due to a
history of retained earnings?
• Do current business account balances (excluding Paycheck Protection Program
(PPP) or other similar COVID-19 related loans or grants) support the financial
ability of the business to operate given current market and economic conditions?
Additional documentation may include a current balance sheet
See Small Business Administration (SBA) Loans and Grants under COVID section for additional
requirements when analyzing funds received under a COVID related loan or grant.
SOCIAL SECURITY INCOME
Social Security Supplemental Security Income (SSI) may be considered as qualifying income that has a
reasonable expectation of continuance unless there is evidence that the benefits will not continue.
Pending or current re-evaluation of medical eligibility for benefit payments is not considered an
indication that the insurance and/or benefit payment will not continue. Social Security benefits received
on behalf of another beneficiary or under another’s Social Security account or work record may not
necessarily continue for three years. In these instances, documentation of continuance will be required.
The following table describes the specific documentation requirements depending on the type of Social
Security been received.
Documentation Requirements
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
Retirement and
Disability
Correspondent
• Bank statement(s) to
document current
receipt; or
• SSI Award letter AND
Executed SSA-3288
Consent for Release of
Information
SSA Award Letter,
Proof of current receipt, AND
Three-year continuance (e.g.,
verification of beneficiary’s age)
Wholesale Bank statement(s) to
document current receipt;
Survivor Benefits N/A
Supplement
Security Income
(SSI)
SSA Award Letter, AND Bank statement(s) to
document current receipt N/A
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Examples of how a borrower might draw Social Security benefits from another person’s
account/work record and use the income:
• 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.)
Newly Established Social Security Income Requirements- Freddie Mac
• The finalized terms of the new income must be documented with the benefit verification
letter, notice of award letter or other equivalent documentation from the payer that provides
and establishes these terms dated within 120 days of the Note date. The terms that must be
verified include, but are not limited to, the source, benefit type, effective date of income
commencement, payment frequency, and pre-determined payment amount that will
commence prior to or on the first mortgage payment due date.
• If the SSI benefits income is newly established, verification of current receipt is not required.
• All survivor and dependent benefit income must be likely to continue for at least the next
three years.
TAX EXEMPT INCOME
When needed for qualification, if income is verified to be nontaxable and its tax-exempt status are likely
to continue, the following requirements must be met to gross up the income:
• Income must be from a non-taxable source such as social security, retirement payments, child
support, disability, workers compensation benefits, or certain public assistance payments
• A copy of the complete federal individual tax return for the most recent one year, or other
documentation evidencing the income, or a portion of, is tax exempt must be provided.
• The non-taxable portion of the income may be grossed up by using a calculation of either
o 25% of the tax-exempt portion of the income
o The current federal and state income tax withholding tables
Social Security Income-Freddie Mac Only
For social security income only, 15% of the gross income received may be grossed up without
further documentation validating the income is tax exempt.
Example of Social Security Income Calculation
Gross Social Security income received monthly $500
Taxable
Portion
85% of income received is considered taxable $500 x 85% = $425
NonTaxable
Portion
15% of the income received is considered nontaxable
$500 x 15% = $75
Non-taxable portion grossed up by 25% $75 x 125% = $93.75
Qualifying
Income
Addition of Taxable and Non-Taxable amounts for
total used for qualification
$425 + $93.75 = $518.75mo
TEMPORARY LEAVES OF ABSENCE (INCLUDING MATERNITY LEAVES)
Temporary leave from an employer may encompass various circumstances (e.g. family and medical,
short-term disability, maternity, other temporary leaves with or without pay). During a temporary leave,
a borrower’s income may be reduced and/or completely interrupted during their absence from work.
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If the borrower will be on temporary leave at the time of closing and the borrower’s income is needed to
qualify, the following must be used to determine the allowable income and confirmation of employment:
• For borrowers returning to their current employer prior to the first mortgage payment due date:
o The borrower’s regular employment gross monthly income amount that will be received
upon the borrower’s return to their current employer may be used.
• For borrowers returning to their current employer after the first mortgage payment due date, the
lesser of below must be used for qualification:
o The borrower’s regular employment gross monthly income; or
o The borrower’s temporary monthly gross leave income (if any):
The use of temporary leave income should be classified as “other” income, and
If temporary income is less than the regular employment income, the temporary
income may be supplemented with available liquid reserves
• Assets that are required for the transaction (e.g., down payment, closing
costs and reserves) may not be considered as available assets to
supplement the income. Assets used for income must be reduced from
the available asset balance(s)
• The number of months of supplemental assets for income is based on the
number of months from the first mortgage payment date to the date the
borrower will begin receiving regular employment income, rounded to the
next whole month
Documentation Requirements
The following documents must be retained in the loan file:
• Verification of the Borrower’s pre-leave income and employment
• Documentation from the current employer confirming the borrower’s statutory right to return
to work, or the employer’s commitment to permit the borrower to return to work.
o Fannie Mae- The confirmation date of return, and the borrower’s post leave
employment and income must be provided.
• Written statement signed by the borrower confirming that the borrower will return to their
current employer stating the confirmation date of return that has been agreed upon between
the borrower and the employer.
In addition, the following documentation is required for borrowers returning to the current employer
after the first mortgage payment due date:
• Documentation evidencing amount, duration, and consistency of all temporary leave income
sources being used to qualify the borrower, e.g., short-term disability benefits or insurance,
sick leave benefits, temporarily reduced income from employer, that are being received
during the temporary leave
• All available liquid assets used to supplement the reduced income for the duration of the
temporary leave must meet requirements of and be verified.
TIP INCOME
• Borrower has received it for the last two years and the employer indicates that the tip income
will in all probability continue.
• An average of the past two years’ tip income must be entered in DU or LPA as Other Income.
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• If the income is not reported by the employer on the WVOE (Form 1005) or paystub and W-2s,
the borrower may document the income reported on Form 4137 (Social Security, and Medicare
Tax on Unreported Tip Income) with the most recent two years of tax returns with the Form
4137 attached.
TRUST INCOME
Trust income may be used as acceptable stable income, if the following documentation requirements
are met:
Fannie Mae
• 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 (e.g. account statements), and
• Receipt of income is required. 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.
Freddie Mac
• Copy of the fully executed trust agreement specifying the amount, frequency, and duration
of payments.
• Fluctuating receipt of payments requires a two-year history of receipt as documented by two
year tax returns.
• Fixed payments require current receipt of income
o A history of receipt is not required for the fixed trust income to be considered stable;
however, the trust income must be likely to continue for at least the next three years.
• The trust income must continue for at least three years from the date of the mortgage
application (e.g. account statements) in order for it to be considered as income.
Lump sum distributions made before the loan closing may be used for down-payment or closing costs,
if they are verified by a copy of the check or the trustee’s letter that shows the distribution amount.
UNEMPLOYMENT BENEFITS
Unemployment benefits, such as those received by seasonal workers, may be considered as
acceptable income if the income is properly documented, has been received for the past two years, and
is predictable and likely to continue (as discussed for seasonal unemployment compensation). Copies
of the borrower’s signed federal income tax returns that were filed with the IRS for the past two years
should be used to establish a history of the receipt of these benefits.
UNION WORKERS
Union workers are members of a specific trade union and are often skilled tradespersons (e.g.
electricians, plumbers, roofers, etc.) Workers can work for a single employer on a long-term basis or for
more than one employer throughout the year. At the completion of a job, the Union will then refer the
individual to a new employer. During the individual’s course of employment with the assigned employer,
they are paid directly by the employer, not the Union. Their jobs may be seasonal and it is not
uncommon for individuals to receive unemployment during down time. If the borrower is in a line of
work that is deemed seasonal (e.g. roofing) and is not working at the time of the loan application or
closing, they may still be eligible for financing. Verify that the borrower is a member of the union and in
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good standing. It is not necessary to verify the union dues or count them as a liability. If the borrower is
a member of a local trade union and obtains employment via these means, income can be verified by
the following:
• Paystubs for the current year, two years tax returns, and two years of W-2s, or
• A WVOE (Form 1005) from the Union for earnings from all employers during the current year
and a W-2 from the prior year.
Fannie Mae
When verifying employment for borrowers who work in occupations that result in a series of shortterm job assignments (such as a skilled construction worker, longshoreman, or stagehand), the
union that facilitates the borrower’s placement in each assignment can provide the following:
• Verbal verification of employment for a union member who is currently employed
• An executed employment offer of contract for future employment for a union member who is
not scheduled to begin employment until after the loan closes.
Freddie Mac
When verifying employment for a borrower who works in an industry where they may switch
employers frequently, the union facilitates the next position, and the borrower has a stable and
consistent employment and income history, the union may provide:
• VVOE for a union member who is currently employed or may or may not be in between
employers at time of closing.
VA BENEFITS
Most VA benefits are acceptable stable income if they are documented by a letter or distribution forms
from the Department of Veterans Affairs and will continue for at least three years from the date of the
mortgage application. Education benefits are not acceptable income because they are offset by
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