What Fannie Mae Considers Stable Income
Fannie Mae focuses on one key question: will your income continue for the foreseeable future? The guideline emphasizes continuity over everything else. Even if you change jobs frequently, you can still qualify as long as your income remains consistent and predictable.
Say you're a software engineer who switches companies every 18 months but maintains the same salary level. Fannie Mae considers this stable income because the pattern shows reliability, even with job changes.
The three-year rule applies to income sources with defined expiration dates. If your income comes from a trust that depletes in two years, or you're on a temporary work contract, your lender must document that the income will continue for at least three years after closing.
How Variable Income Gets Calculated
Variable income includes commissions, bonuses, overtime pay, and fluctuating hourly wages. Fannie Mae requires lenders to examine three factors: your history of receiving this income, how often you get paid, and whether the amounts are trending up, down, or staying stable.
The two-year history requirement exists because variable income can swing dramatically. A real estate agent might earn $80,000 one year and $45,000 the next. Lenders need to see a pattern before they can predict future earnings.
However, you might qualify with just 12-24 months of history if you have strong offsetting factors. These could include a promotion, additional training, or moving to a higher-producing territory.
Frequency matters for accurate calculations. If you receive an annual bonus of $12,000 every March, your lender divides that by 12 months to get $1,000 monthly qualifying income. They don't divide by three months just because you received it in March, which would inflate your monthly average to $4,000.
The Income Trending Analysis
After calculating your monthly variable income, lenders compare it to previous years using your W-2s or tax returns. This trending analysis determines how much of your variable income counts toward qualification.
If your income is stable or increasing, lenders average your earnings over the review period. Say your commission income was $40,000 two years ago and $44,000 last year. Your lender would use the average of $42,000 annually, or $3,500 monthly.
Declining income creates problems. If your earnings dropped but have since stabilized, lenders must use the current lower amount rather than averaging. If the decline continues, your variable income might not qualify at all.
Consider a sales manager whose commission dropped from $60,000 to $35,000 due to territory changes, but has remained steady at $35,000 for the past year. The lender would use $35,000 annually, not the higher historical average.
Required Documentation for Income Verification
Most borrowers need standard employment verification through pay stubs, W-2s, and employer verification. However, specific situations require federal tax returns.
You must provide tax returns if you:
- Work for family members or parties involved in your property transaction
- Receive rental income from investment properties
- Have temporary, contract, or time-limited employment
- Earn income from capital gains, royalties, or 1099 miscellaneous income
- Own 25% or more of a business (considered self-employed)
- Use foreign income, tip income, or interest and dividend income to qualify
Self-employed borrowers or those with significant business ownership face additional scrutiny. If you own 25% or more of any business, you must provide tax returns and follow self-employment income guidelines outlined in [[B3-3.2]].
For most situations requiring tax returns, lenders need two years of returns. Some exceptions exist where one year suffices, particularly for certain DU-validated loans.
Nontaxable Income Advantages
Fannie Mae allows lenders to "gross up" nontaxable income by 25%, which can significantly boost your qualifying income. This applies to child support, Social Security benefits, workers' compensation, and certain public assistance payments.
The math works in your favor. If you receive $2,000 monthly in nontaxable Social Security benefits, your lender can add 25% of the nontaxable portion to your qualifying income. For Social Security, 15% is automatically considered nontaxable, so 15% of $2,000 equals $300. Adding 25% of that $300 gives you an extra $75 monthly qualifying income.
Child support receives special treatment. The entire documented amount is considered nontaxable, so a $1,500 monthly child support payment becomes $1,875 in qualifying income after the 25% gross-up.
You must verify that income is actually nontaxable through award letters, account statements, or tax returns. The exceptions are child support (fully nontaxable), Section 8 homeownership payments (fully nontaxable), and Social Security (15% automatically nontaxable).
Common Problems That Trip Up Borrowers
Declining variable income creates the biggest qualification challenges. If your commission or bonus income dropped by more than 25% year-over-year without stabilizing, lenders may not use it at all. This catches many borrowers off guard, especially those who assume lenders will average their good years with their bad years.
Job changes during the loan process require careful handling. If you're transitioning to lower pay due to retirement or a new position, lenders must use the lower amount to qualify you, even if your current income is higher.
Business ownership percentages matter more than many borrowers realize. Owning exactly 25% of a business triggers self-employment documentation requirements, which are much more complex than standard employment verification.
Cryptocurrency and virtual currency income cannot be used for qualification, regardless of how substantial or consistent it might be. This rule has no exceptions.
Foreign income requires additional documentation, including currency exchange rate verification and proof that the income will continue. U.S. citizens earning foreign income face different requirements than non-U.S. citizens, detailed in B3-3.1-04: Commission Income.
References
For the official guidelines, see B3-3.1-01: General Income Information in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
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Original Fannie Mae Guideline Text
B3-3.1-01, General Income Information (05/01/2024)
Continuity of Income
Determining the Need for Federal Income Tax Returns
Verification of Income for Non-U.S. Citizen Borrowers
Using Nontaxable Income to Adjust the Borrower’s Gross Income
Reduced Income Documentation Requirements for High LTV Refinance Loans
Stable and Predictable Income
Fannie Mae’s underwriting guidelines emphasize the continuity of a borrower’s stable income. The stable and reliable flow of income is a key consideration in mortgage loan underwriting. Individuals who change jobs frequently, but who are nevertheless able to earn consistent and predictable income, are also considered to have a reliable flow of income for qualifying purposes.
To demonstrate the likelihood that a consistent level of income will continue to be received for borrowers with less predictable sources of income, the lender must obtain information about prior earnings. Examples of less predictable income sources include commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradesmen.
Variable Income
All income that is calculated by an averaging method must be reviewed to assess the borrower’s history of receipt, the frequency of payment, and the trending of the amount of income being received. Examples of income of this type include income from hourly workers with fluctuating hours, or income that includes commissions, bonuses, or overtime.
History of Receipt: Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may be considered as acceptable income, as long as the borrower’s loan application demonstrates that there are positive factors that reasonably offset the shorter income history.
For loans with variable income validated by the DU validation service, the required history of receipt may differ from the requirements described above. DU will determine the history required to validate an income type.
Frequency of Payment: The lender must determine the frequency of the payment (weekly, biweekly, monthly, quarterly, or annually) to arrive at an accurate calculation of the monthly income to be used in the trending analysis (see below). Examples:
If a borrower is paid an annual bonus on March 31st of each year, the amount of the March bonus should be divided by 12 to obtain an accurate calculation of the current monthly bonus amount. Note that dividing the bonus received on March 31st by three months produces a much higher, inaccurate monthly average.
If a borrower is paid overtime on a biweekly basis, the most recent paystub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income. For example, borrowers may have overtime income that is cyclical (such as transportation employees who operate snow plows in winter, package delivery service workers who work longer hours through the holidays). The lender must investigate the difference between current period overtime and year-to-date earnings and document the analysis before using the income amount in the trending analysis.
Income Trending: After the monthly year-to-date income amount is calculated, it must be compared to prior years’ earnings using the borrower’s W-2’s or signed federal income tax returns (or a standard Verification of Employment completed by the employer or third-party employment verification vendor).
If the trend in the amount of income is stable or increasing, the income amount should be averaged.
If the trend was declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used.
If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the declination occurred.
Continuity of Income
A key driver of successful homeownership is confidence that all income used in qualifying the borrower will continue to be received by the borrower for the foreseeable future. Unless the lender has knowledge to the contrary, if the income does not have a defined expiration date and the applicable history of receipt of the income is documented (per the specific income type), the lender may conclude that the income is stable, predictable, and likely to continue. The lender is not expected to request additional documentation from the borrower.
If the income source does have a defined expiration date or is dependent on the depletion of an asset account or other limited benefit, the lender must document the likelihood of continued receipt of the income for at least three years.
If the lender is notified that the borrower is transitioning to a lower pay structure, for example due to pending retirement or a new job, the lender must use the lower amount to qualify the borrower.
The following table contains examples of income types with and without defined expiration dates. This information is provided to assist lenders in determining whether additional income documentation may be necessary to support a three-year continuance. Lenders are responsible for making the final determination of whether the borrower’s specific income source has a defined expiration date. See
for additional information related to the use and documentation of specific income sources.
Examples of income types without a defined expiration date
Examples of income types with a defined expiration date
Lender does not need to document 3–year continuance
Lender must document 3–year continuance
Note that continuity of income for trust income must be based on the type of income received through the trust. For example, if the income from the trust is derived from rental income, then three-year continuance is not required. However, if the income is a fixed payment derived from a depleting asset, then three-year continuance must be determined.
Income sources that are not listed above will require lender judgment to determine if documentation of continuance must be obtained.
Determining the Need for Federal Income Tax Returns
The lender must obtain copies of the borrower’s signed federal income tax returns filed with the IRS for the past one or two years (depending on the income type) for the following sources of income or employment. Refer to the applicable topics in Chapter B3-3, Income Assessment for additional information about specific tax return requirements.
Tax returns are required if the borrower
is employed by family members (two years’ returns);
is employed by interested parties to the property sale or purchase (two years’ returns);
receives rental income from an investment property;
receives income from temporary or periodic employment (or unemployment) or employment that is subject to time limits, such as a contract employee or a tradesman;
receives income from capital gains, royalties, or other miscellaneous non-employment earnings reported on IRS Form 1099;
receives income that cannot otherwise be verified by an independent and knowledgeable source (two years’ returns);
uses foreign income to qualify;
uses interest and dividend income to qualify;
uses tip income reported on IRS Form 4137 that was not reported by the employer on the W-2 to qualify; or
receives income from sole proprietorships, limited liability companies, partnerships, or corporations, or any other type of business structure in which the borrower has a 25% or greater ownership interest. Borrowers with a 25% or greater ownership interest are considered self-employed. The lender must document and underwrite the loan application using the requirements for self-employed borrowers, as described in Section B3–3.2, Self-Employment Income. Note that for DU loan casefiles, only the most recent year of tax returns may be required.
If a borrower’s income is validated by the DU validation service, lenders are not required to determine if the borrower is employed by a family member or interested party to the property sale or purchase. See
.
See
, for information about obtaining tax return transcripts.
Verification of Income for Non-U.S. Citizen Borrowers
The following table describes income verification requirements for borrowers who are non-U.S. citizens:
Employment Type
Employment and Income Verification Requirements
Salaried or commissioned borrower employed by a U.S. company or individual
Same as for a U.S. citizen. See Section B3-3.1, Employment and Other Sources of Income.
Self-employed
Same as for a U.S. citizen. See Section B3-3.2, Self-Employment Income.
Employed by a foreign corporation or a foreign government and paid in foreign currency (“foreign income”)
The lender must obtain:
For information on U.S. citizens earning foreign income, refer to
.
Using Nontaxable Income to Adjust the Borrower’s Gross Income
The lender should give special consideration to regular sources of income that may be nontaxable, such as child support payments, Social Security benefits, workers’ compensation benefits, certain types of public assistance payments, and food stamps.
The lender must verify that the particular source of income is nontaxable, unless the source of income meets one of the exceptions below. Documentation that can be used for this verification includes award letters, policy agreements, account statements, tax returns or any other documents that address the nontaxable status of the income.
If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the lender should develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25% of the nontaxable income to the borrower’s income.
If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower’s nontaxable income, the lender may use that amount to develop the adjusted gross income, which should be used in calculating the borrower’s qualifying ratio.
Exceptions:
The lender is not required to provide documentation to support that the income is nontaxable for the following:
Child support income: The full amount of documented qualifying child support is nontaxable.
Section 8 Housing Choice Voucher Homeownership Program payments: The full amount of income from these payments is nontaxable.
Social Security income: 15% of the income is nontaxable.
Nontaxable amount: $1,500 x 15% = $225
Gross-up amount: $225 x 25% = $56 (rounded to the nearest dollar)
Qualifying income: $1,556 (does not require additional documentation)
Note: If the lender opts to gross-up more than 15% of Social Security income, documentation to support that the additional income is nontaxable must be included in the loan file.
Reduced Income Documentation Requirements for High LTV Refinance Loans
For certain high LTV refinance loans, lenders are not required to follow the income documentation requirements described in this Chapter. Refer to Chapter B5-7: High Loan-to-Value Refinance Option for specific requirements.
Income Paid in Virtual Currency
Any income paid to or earned by the borrower in the form of virtual currency, such as cryptocurrencies, is not eligible to be used to qualify for the loan. For other income types see
. SEL-2020-07
