What DU Income Documentation Really Means
Desktop Underwriter streamlines the documentation process but doesn't eliminate it. Think of DU as setting the minimum bar — your lender can always ask for more if something doesn't add up.
The system analyzes your loan application data and tells your lender exactly what documents to collect. This creates a more predictable process than manual underwriting, where requirements can vary significantly between lenders.
Say you're a teacher with a base salary of $65,000 plus $8,000 in summer school income. DU will require your recent paystubs and W-2s for the base pay, but it will want two years of documentation for that summer school income since it's considered variable.
How Documentation Requirements Vary by Income Type
Base Pay Documentation
For salary or hourly wages, DU keeps it simple. Your lender needs either a completed Form 1005 (Request for Verification of Employment) or your recent paystub plus W-2s covering the most recent year.
Military borrowers can substitute their Leave and Earnings Statement (LES) for the paystub and W-2 combination. This covers both base pay and military allowances in one document.
Variable Income Documentation
Bonuses, overtime, and commission income require more extensive documentation. DU wants to see a two-year pattern to ensure this income is stable and likely to continue.
Your lender will need either Form 1005 or your recent paystub plus W-2s covering the most recent two years. The paystub shows your current earnings pattern, while the W-2s demonstrate the historical consistency DU requires.
Consider a sales manager earning $75,000 base plus $25,000 in annual bonuses. The lender will average the bonus income from the last two years of W-2s. If year one showed $30,000 in bonuses and year two showed $20,000, they'd use $25,000 as the qualifying amount.
Self-Employment Documentation
Self-employment rules depend on your ownership percentage. If you own 25% or more of the business, DU considers you self-employed and requires personal tax returns. The system may allow just one year of returns if you've been self-employed for at least five years.
Business tax returns are only required for corporations, S corporations, LLCs, and partnerships. Sole proprietors typically don't need separate business returns since everything flows through their personal Schedule C.
A contractor who owns 100% of his LLC and has been in business for seven years might only need one year of personal tax returns. But if he incorporated just three years ago, DU will require two years of both personal and business returns.
The Verbal Verification Requirement
Every DU loan requires verbal verification of employment, regardless of what other documentation you provide. This isn't optional — it's a hard requirement that catches many borrowers off guard.
Your lender will call your employer within 10 days of closing to confirm you still work there, verify your position, and confirm your income. For self-employed borrowers, this might involve calling your accountant or business partner.
The verbal verification has specific requirements covered in [[B3-3.1-07]]. Your employer needs to provide certain details about your employment, and the lender must document the conversation properly.
Special Situations and Documentation Alternatives
DU Validation Service
When DU can validate your employment or income through its validation service, the documentation requirements may change. The system will issue specific messages telling your lender what's needed, which might be different from the standard requirements.
This service can access payroll data directly from some employers, potentially reducing your paperwork burden. But it's not available for all employers or income types.
High LTV Refinances
High loan-to-value refinance transactions get reduced documentation requirements under certain conditions. These are covered in detail in [[B5-7-02]], but the basic idea is that existing homeowners with payment history may need less income verification.
Secondary Employment
Income from a second job requires two years of paystubs and W-2s when it's not self-employment income. DU treats this as variable income since second jobs can be less stable than primary employment.
A nurse who works per-diem shifts at a second hospital would need to document that income for two years, even though her primary hospital job might only require one year of documentation.
Common Documentation Pitfalls
Incomplete Tax Return Requirements
Self-employed borrowers often assume they need business tax returns when they don't. If you're a sole proprietor filing Schedule C, you typically don't need separate business returns. But if you're an S-corp owner, you'll need both personal and business returns.
The ownership percentage matters too. Own 24% of a business? You're not considered self-employed for DU purposes, and your K-1 income gets treated differently.
Nontaxable Income Calculations
DU doesn't automatically calculate the gross-up for nontaxable income. Your lender needs to manually adjust qualifying income upward by 25% for things like VA disability, Social Security, or municipal bond interest.
This adjustment must meet specific requirements outlined in [[B3-3.1-01]]. The income must be stable, continuing, and properly documented to qualify for the gross-up treatment.
Temporary Leave Complications
Borrowers on maternity leave, disability, or other temporary leave face complex documentation requirements. The rules in [[B3-3.1-09]] specify exactly how to handle these situations, including when you can use liquid reserves to supplement reduced income.
If you're returning to work before your first mortgage payment, your lender can use your regular employment income. But if you're not returning, they must use the lesser of your leave income or regular income, with specific entry requirements in DU.
Why These Rules Exist
Fannie Mae's documentation requirements reflect decades of loan performance data. Two-year histories for variable income exist because commission and bonus payments can fluctuate significantly year to year.
The verbal verification requirement catches employment changes that might have occurred after your initial application. Job loss between application and closing is a major risk factor that paper documentation alone might miss.
DU's streamlined approach works because the system analyzes multiple risk factors simultaneously. A borrower with excellent credit and substantial assets might get reduced documentation requirements, while someone with marginal qualifications faces more stringent verification.
References
For the official guidelines, see B3-3.5-01: Income and Employment Documentation for DU in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
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Original Fannie Mae Guideline Text
B3-3.5-01, Income and Employment Documentation for DU (10/04/2023)
General Income Documentation Requirements
Reduced Income Documentation Requirements for High LTV Refinance Loans
Alternative Documentation Requirements for Income Validated by the DU Validation Service
Commission Income
Secondary Employment Income (Second Job and Multiple Jobs)
Nontaxable Income
General Income Documentation Requirements
DU indicates the minimum income verification documentation required to process a loan application. This level of documentation may not be adequate for every borrower and every situation. The lender must determine whether additional documentation is warranted. If the lender is unable to determine the stability of the borrower’s income on the basis of the available documentation, the income must be removed and the loan resubmitted to DU.
The standards for employment documentation are the same for DU loan casefiles as they are for manually underwritten loans. For example, paystubs, W-2s, and tax returns must meet the same requirements without regard to the underwriting method. The following information describes DU considerations for specific types of income. For additional information, see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns, and Section B3–3.1, Employment and Other Sources of Income.
Note: Only actual employer information should be entered in the employment section of the loan application. For example, do not enter “retired” or “homemaker” as the borrower’s current employer.
Reduced Income Documentation Requirements for High LTV Refinance Loans
DU offers a reduced level of income documentation for high LTV refinance loans. Refer to B5-7-02, High LTV Refinance Underwriting, Documentation, and Collateral Requirements for the New Loan, for additional information.
Alternative Documentation Requirements for Income Validated by the DU Validation Service
When a component of the loan file is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation requirement may differ from those described below. See B3-2-02, DU Validation Service.
DU will require the following:
a completed Request for Verification of Employment (Form 1005),
the borrower's recent paystub and IRS W-2 forms covering the most recent one-year period, or
the borrower's recent Leave and Earnings Statement (LES) for military income and entitlements.
DU will require the following:
a completed Form 1005, or
the borrower's recent paystub and IRS W-2 forms covering the most recent two-year period.
DU will require the following:
a completed Form 1005, or
the borrower’s recent paystub and IRS W-2 forms covering the most recent two-year period.
Secondary Employment Income (Second Job and Multiple Jobs)
When the second job income is not from self-employment, DU will require the borrower's recent paystub and IRS W-2 forms covering the most recent two-year period.
Self-Employment Income
If the borrower is the business owner or is self-employed, the business owner/self-employed indicator must be checked in the loan application along with the percentage of ownership. DU will consider the borrower self-employed if the ownership share is 25% or more, or if the ownership share is not completed but the business owner/self-employed indicator is checked. If the ownership share is 25% or more, the income is entered in Monthly Income (or Loss) based on the lender’s calculation of net income (or loss) from self-employment. If the ownership share is less than 25%, the income is entered in Gross Monthly Income (base, bonus, overtime, etc.). Schedule K-1 income for these borrowers should be entered as Other in Gross Monthly Income.
For DU loan casefiles where two years of the most recent signed personal and two years of the most recent signed business federal income tax returns are required, business tax returns do not have to be provided unless the business is a corporation, an S corporation, a limited liability company, or a partnership. Under certain conditions, the requirements for business tax returns may be waived.
DU will issue a message permitting only one year of personal federal tax returns if the loan application indicates the borrower is self-employed with an ownership share of 25% or more, and the Start Date for all self-employed businesses is at least five years prior to the Casefile Create Date. If any of the borrower's self-employed businesses have a Start Date less than five years, DU will require two years of personal tax returns. DU will issue a separate message listing the requirements for business tax returns for all self-employed businesses, specifying that one- or two-years of tax returns are required based on the number of years the business has been in existence (determined by comparing the Start Date to the Casefile Create Date).
Refer to B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower for additional information and requirements related to underwriting, documenting, and calculating self-employed income.
Verbal Verification of Employment
A verbal VOE is required for each employer. For requirements regarding verbal VOEs, see B3-3.1-07, Verbal Verification of Employment.
Other Income
Other income must be entered in the loan application. DU supports a number of other income types. Income types not available in DU must be entered as “Other” income.
Refer to B3-3.1-09, Other Sources of Income, B3-3.1-05, Secondary Employment Income (Second Job and Multiple Jobs) and Seasonal Income, and B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements, for information on eligibility and verification of other sources of income.
Temporary Leave Income
When income from temporary leave is being used to qualify for the mortgage loan, the lender must enter the appropriate qualifying income amount into DU based on the requirements provided in B3-3.1-09, Other Sources of Income.
If the borrower will return to work as of the first mortgage payment date, the lender can consider the borrower's regular employment income in qualifying and must enter the income into DU using the applicable income type.
If the borrower will not return to work as of the first mortgage payment date, but is able to qualify using the lesser of the borrower's temporary leave income (if any) or regular employment income, that “lesser of” income amount must be entered into DU. Entry of the income into DU depends on what was derived as the “lesser of” amount:
When the borrower's temporary leave income is used, enter the income amount into DU using the other income type Temporary Leave.
When the borrower's regular employment income is used, enter the income amount in DU using the applicable income type.
If the borrower's temporary leave income is less than the regular employment income and the lender is able to “supplement” the temporary income with available liquid reserves (per
B3-3.1-09, Other Sources of Income), the following must be applied:
The lender must enter the combined temporary leave income and supplemental income from reserves in DU using the other income type Temporary Leave. The combination of these two incomes may not exceed the borrower's regular monthly employment income.
As DU is not able to determine that supplemental income is being used, nor is it able to determine the amount of reserves used to supplement the temporary income, the lender must manually reduce the amount of the borrower's total liquid assets by the amount of reserves used to supplement the temporary income (in order to avoid the reserves being used for both income and assets).
Nontaxable Income
DU does not provide any unique messaging identifying the use of adjusted gross income.
See B3-3.1-01, General Income Information, for guidance on how to calculate adjusted gross income for nontaxable income. This topic also defines the requirements that nontaxable income must meet to be considered for qualifying purposes in DU. If these requirements are not met, the borrower’s income must be adjusted downward.
Note: Certain loan origination systems offer an automatic calculation of adjusted gross income when nontaxable income types are entered in the loan application.
