Understanding Alternative Income Sources
Fannie Mae recognizes dozens of income sources beyond your regular W-2 wages. These range from alimony and Social Security to more complex arrangements like employment-related assets and restricted stock compensation.
The key principle applies to all: the income must be stable and likely to continue. For most sources, this means at least 3 years of expected continuance from your loan application date.
Say you receive $800 monthly in Social Security disability benefits. Your lender can count this full amount toward qualifying because disability benefits typically continue indefinitely. But if you get $500 monthly in child support that ends when your daughter turns 18 in two years, that income won't qualify because it doesn't meet the 3-year requirement.
Documentation Requirements That Apply Across Income Types
Every alternative income source needs proof of current receipt. This usually means documentation no older than the limits in Fannie Mae's "Allowable Age of Credit Documents" policy - typically 60 to 120 days depending on the document type.
Current receipt can be shown through recent paystubs, bank statements showing direct deposits, canceled checks from the payer, or court records. The documentation must prove you're actually receiving the income, not just entitled to it.
For variable income sources, you'll need a 2-year history documented through tax returns. Your lender will average the income over those two years to determine your qualifying amount.
Income Sources That Require Special Handling
Alimony and Child Support
These payments can be powerful qualifying income, but only if you voluntarily disclose them on your loan application. Lenders cannot ask about alimony or child support - you must bring it up.
You'll need to prove at least 6 months of full, regular, and timely payments. Sporadic or partial payments don't count. The payments must continue for at least 3 years after your application date.
Required documents include your divorce decree or separation agreement, plus 6 months of bank statements or canceled checks showing consistent receipt.
Employment-Related Assets as Income
This provision lets you use retirement accounts, severance packages, or stock compensation as qualifying income by converting the assets into a monthly payment stream.
The calculation divides your net documented assets by your loan term in months. If you have $360,000 in eligible assets after subtracting penalties and closing costs, and you're getting a 30-year loan, that creates $1,000 monthly qualifying income ($360,000 ÷ 360 months).
This option comes with strict limitations: maximum 70% loan-to-value ratio (80% if you're 62 or older), purchase or limited cash-out refinance only, and principal residence or second home only.
Social Security Income
Social Security benefits you receive from your own work record qualify without time limits because they continue indefinitely. But if you're receiving benefits based on someone else's record - like spousal benefits or payments for a dependent child - you need to document 3-year continuance.
Documentation includes your SSA award letter, Form SSA-1099, or recent tax returns showing the Social Security income.
Common Complications and Gotchas
Virtual currency creates an immediate disqualification. If any part of your income comes from cryptocurrency or other virtual currency, it cannot be used for qualifying. This includes assets held in virtual currency form.
Boarder income is generally not acceptable, with limited exceptions for live-in personal assistants for borrowers with disabilities or specific HomeReady mortgage situations.
Capital gains income requires special treatment because it's typically one-time. You need a 2-year history plus current evidence that you own additional assets that could be sold if needed for future mortgage payments.
Temporary leave income creates complexity if you'll be on leave during closing. Your lender must verify your intent to return to work and may need to use your reduced leave income or supplement it with liquid reserves.
Why These Rules Exist
Fannie Mae's requirements reflect the reality that alternative income sources often carry more risk than regular employment income. A 2-year history requirement for variable income helps establish that earnings are stable or trending upward, not declining.
The 3-year continuance rule ensures you'll have the income throughout the early years of your mortgage when payment shock is most likely. Fannie Mae learned from experience that borrowers struggle when income sources disappear shortly after closing.
Current receipt requirements prevent qualification based on income you're supposed to get but aren't actually receiving. This protects both you and the lender from loans based on theoretical rather than actual cash flow.
What Documents to Prepare
Start by gathering proof of current receipt for each income source. This means recent bank statements, paystubs, or direct deposit records showing the income actually hitting your account.
For variable income, collect your last 2 years of complete tax returns including all schedules. Your lender will need to see the income reported consistently.
Get official documentation from the income source. This might be benefit statements from Social Security, award letters from disability insurers, or verification letters from employers paying allowances.
If your income has specific continuation requirements, gather evidence of future eligibility. For child support, this means documentation showing how long payments will continue. For disability benefits, you'll need the policy or benefit statement showing the duration.
References
For the official guidelines, see B3-3.1-09: Other Sources of Income in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Fannie Mae Guideline Text
B3-3.1-09, Other Sources of Income (10/08/2025)
Documentation Requirements for Current Receipt of Income
Alimony, Child Support, or Separate Maintenance
Employment Offers or Contracts
Employment-Related Assets as Qualifying Income
Public Assistance Income
Restricted Stock Units and Restricted Stock Employment Income
Retirement, Government Annuity, and Pension Income
VA Benefits Income
Documentation Requirements for Current Receipt of Income
The documentation required for each income source is described below. The documentation must support the history of receipt, if applicable, and the amount, frequency, and duration of the income. In addition, evidence of current receipt of the income must be obtained in compliance with the Allowable Age of Credit Documents policy, unless specifically excluded below. See
, for additional information.
Current receipt may be documented by various means, depending on the income type. Examples include but are not limited to
current paystubs,
bank statements confirming direct deposit,
canceled checks from the payer’s account to the borrower,
court records, or
copies of the borrower’s bank statements showing the regular deposit of these funds.
Note: Any income received by the borrower in the form of virtual currency, such as cryptocurrencies, is not eligible to be used to qualify for the loan. For income types that require sufficient remaining assets to establish continuance, those assets cannot be in the form of virtual currency.
Alimony, Child Support, or Separate Maintenance
The following table provides verification requirements for alimony, child support, or separate maintenance.
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Verification of Income From Alimony, Child Support, or Separate Maintenance
Document that alimony, child support, or separate maintenance will continue to be paid for at least three years after the date of the mortgage application, as verified by one of the following:
Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid.
Document no less than six months of the borrower’s most recent regular receipt of the full payment.
Review the payment history to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer. Income received for less than six months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.
Note: The lender may include alimony, child support, or separate maintenance as income only if the borrower discloses it on the Form 1003 and requests that it be considered in qualifying for the loan.
If a borrower's alimony or child support income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above for the verification of the borrower's regular receipt of the full payment and its use as stable qualifying income. See
.
Automobile Allowance
For an automobile allowance to be considered as acceptable stable income, the borrower must have received payments for at least two years. The lender must add the full amount of the allowance to the borrower’s monthly income, and the full amount of the lease or financing expenditure to the borrower’s monthly debt obligations.
Boarder Income
Income from boarders in the borrower’s principal residence or second home is not considered acceptable stable income with the exception of the following:
When a borrower with disabilities receives rental income from a live-in personal assistant, whether or not that individual is a relative of the borrower, the rental payments can be considered as acceptable stable income in an amount up to 30% of the total gross income that is used to qualify the borrower for the mortgage loan. Personal assistants typically are paid by Medicaid Waiver funds and include room and board, from which rental payments are made to the borrower.
The HomeReady mortgage eligibility requirements include an additional exception. See Chapter B5-6, HomeReady Mortgage.
The following table provides verification requirements for income from boarders.
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Verification of Income from Boarders
Obtain documentation of the boarder’s history of shared residency (such as a copy of a driver’s license, bills, bank statements, or W-2 forms) that shows the boarder’s address as being the same as the borrower’s address.
Obtain documentation of the boarder’s rental payments for the most recent 12 months.
Capital Gains Income
Income received from capital gains is generally a one-time transaction; therefore, it should not be considered as part of the borrower’s stable monthly income. However, if the borrower needs to rely on income from capital gains to qualify, the income must be verified in accordance with the following requirements.
✓
Verification of Capital Gains Income
Document a two-year history of capital gains income by obtaining copies of the borrower’s signed federal income tax returns for the most recent two years, including IRS Form 1040, Schedule D.
Develop an average income from the last two years (according to the Variable Income section of
), and use the averaged amount as part of the borrower’s qualifying income as long as the borrower provides current evidence that they own additional property or assets that can be sold if extra income is needed to make future mortgage loan payments.
Due to the nature of this income, current receipt of the income is not required to comply with the Allowable Age of Credit Documents policy. However, documentation of the asset ownership must be in compliance with the Allowable Age of Credit Documents policy (see
, for additional information).
Disability Income — Long-Term
The following table provides verification requirements for long-term disability income. It does not apply to disability income that is received from the Social Security Administration. See the applicable section below for information on Social Security income.
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Verification of Long-Term Disability Income
Obtain a copy of the borrower’s disability policy or benefits statement from the benefits payer (insurance company, employer, or other qualified disinterested party) to determine
Generally, long-term disability will not have a defined expiration date and must be expected to continue. The requirement for re-evaluation of benefits is not considered a defined expiration date.
If a borrower is currently receiving short-term disability payments that will decrease to a lesser amount within the next three years because they are being converted to long-term benefits, the amount of the long-term benefits must be used as income to qualify the borrower. For additional information on short-term disability, see Temporary Leave Income below.
If a borrower's disability income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See
.
Employment Offers or Contracts
If the borrower is scheduled to begin employment under the terms of an employment offer or contract, the lender may deliver the loan in accordance with one of the options outlined below.
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Option 1 -- Paystub Obtained Before Loan Delivery
The lender must obtain an executed copy of the borrower's offer or contract for future employment and anticipated income.
Prior to delivering the loan, the lender must obtain a paystub from the borrower that includes sufficient information to support the income used to qualify the borrower based on the offer or contract. The paystub must be retained in the mortgage loan file.
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Option 2 -- Paystub Not Obtained Before Loan Delivery
This option is limited to loans that meet the following criteria:
The lender must obtain and review the borrower’s offer or contract for future employment. The employment offer or contract must
Also note that for a union member who works in an occupation that results in a series of short-term job assignments (such as a skilled construction worker, longshoreman, or stagehand), the union may provide the executed employment offer or contract for future employment.
The borrower’s start date must be no earlier than 30 days prior to the note date or no later than 90 days after the note date.
Prior to delivery, the lender must obtain the following documentation depending on the borrower’s employment start date:
If the borrower’s start date is...
Documentation Required
The note date or no more than 30 days prior to the note date
No more than 90 days after the note date
Employment offer or contract
The lender must document, in addition to the amount of reserves required by DU or for the transaction, one of the following:
The lender must deliver the loan with Special Feature Code 707.
Employment-Related Assets as Qualifying Income
The following table provides the requirements for employment-related assets that may be used as qualifying income.
✓
Asset Requirements
Assets used for the calculation of the monthly income stream must be owned individually by the borrower, or the co-owner of the assets must be a co-borrower of the mortgage loan.
The documentation must be in compliance with
.
Assets must be liquid and available to the borrower and must be sourced as one of the following:
If a penalty would apply to a distribution of funds from the account made at the time of calculation, then the amount of such penalty applicable to a complete distribution from the account (after costs for the transaction) must be subtracted to determine the income stream from these assets.
A borrower must only be considered to have unrestricted access to a 401(k) or IRA, SEP, Keogh retirement account if the borrower has, as of the time of calculation, the unqualified and unlimited right to request a distribution of all funds in the account (regardless of any possible tax withholding or applicable penalty applied to such distribution).
“Net documented assets” are equal to the sum of eligible assets minus:
(a) the amount of the penalty that would apply if the account was completely distributed at the time of calculation; and
(b) the amount of funds used for down payment, closing costs, and required reserves.
Ineligible assets are non-employment-related assets (for example, stock options, non-vested restricted stock, lawsuits, lottery winnings, sale of real estate, inheritance, and divorce proceeds). Checking and savings accounts are generally not eligible as employment-related assets, unless the source of the balance in a checking or savings account was from an eligible employment-related asset (for example, a severance package or lump sum retirement distribution). Virtual currency is not an eligible asset.
If eligible employment-related assets have been liquidated and placed into a trust within 12 months of the loan's application date, income must be calculated in accordance with the requirements in this table.
Example: Calculation of Net Documented 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
(=) $450,000
(down payment, closing costs, reserves)
(-) $100,000
(=) $350,000
Monthly income calculation
($350,000/360 (or applicable term of loan in months))
See Income Calculation/Payout Stream in table below.
$972.22/month
All of the following loan parameters must be met in order for employment-related assets to be used as qualifying income:
70%
80% if the owner of the asset(s) being used to qualify is at least 62 years old at the time of closing. If the asset(s) is jointly owned, all owners must be a borrower on the loan and the borrower using the income to qualify must be at least 62 years old at the time of closing.
Loan Purpose
Purchase and limited cash-out refinance only
Occupancy
Principal residence and second home only
Income Calculation/Payout Stream
Divide “Net Documented Assets” by the amortization term of the mortgage loan (in months).
Note: If the mortgage loan does not meet the above parameters, employment-related assets may still be eligible under other standard income guidelines, such as “Interest and Dividends Income,” or “Retirement, Government Annuity, and Pension Income.”
Foreign Income
Foreign income is income that is earned by a borrower who is employed by a foreign corporation or a foreign government and is paid in foreign currency. Borrowers may use foreign income to qualify if the following requirements are met.
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Verification of Foreign Income
Copies of signed federal income tax returns for the most recent two years that include foreign income.
The lender must satisfy the standard documentation requirements based on the source and type of income as outlined in Chapter B3–3, Income Assessment.
All documents of a foreign origin must be completed in English, or the originator must provide a translation, attached to each document, and ensure the translation is complete and accurate.
Foster-Care Income
Income received from a state- or county-sponsored organization for providing temporary care for one or more children may be considered acceptable stable income if the following requirements are met.
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Verification of Foster-Care Income
Verify the foster-care income with letters of verification from the organizations providing the income.
Document that the borrower has a two-year history of providing foster-care services. If the borrower has not been receiving this type of income for two full years, the income may still be counted as stable income if
Housing or Parsonage Allowance
A housing or parsonage allowance may be considered qualifying income if there is documentation that it has been received for the most recent 12 months and the allowance is likely to continue for the next three years. The housing allowance may be added to income but may not be used to offset the monthly housing payment.
Note: This requirement does not apply to military quarters’ allowance. For information on military housing, refer to
.
Interest and Dividends Income
The following table provides verification requirements for interest and dividends income.
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Verification of Income From Interest and Dividends
Verify the borrower’s ownership of the assets on which the interest or dividend income was earned. Documentation of asset ownership must be in compliance with the Allowable Age of Credit Documents policy (see
, for additional information).
Document a two-year history of the income, as verified by
Develop an average of the income received for the most recent two years. Refer to the Variable Income section of
, for additional information.
Subtract any assets used for down payment or closing costs from the borrower’s total assets before calculating expected future interest or dividend income.
Mortgage Credit Certificates
States and municipalities can issue mortgage credit certificates (MCCs) in place of, or as part of, their authority to issue mortgage revenue bonds. MCCs enable an eligible first-time homebuyer to obtain a mortgage secured by their principal residence and to claim a federal tax credit for a specified percentage (usually 20% to 25%) of the mortgage interest payments.
When calculating the borrower’s DTI ratio, treat the maximum possible MCC income as an addition to the borrower’s income, rather than as a reduction to the amount of the borrower’s mortgage payment. Use the following calculation when determining the available income:
[(Mortgage Amount) x (Note Rate) x (MCC %)] ÷ 12 = Amount added to borrower’s monthly income.
For example, if a borrower obtains a $100,000 mortgage that has a note rate of 7.5% and they are eligible for a 20% credit under the MCC program, the amount that should be added to their monthly income would be $125 ($100,000 x 7.5% x 20% = $1500 ÷ 12 = $125).
The lender must obtain a copy of the MCC and the lender’s documented calculation of the adjustment to the borrower’s income and include them in the loan file.
For refinance transactions, the lender may allow the MCC to remain in place as long as it obtains confirmation prior to loan closing from the MCC provider that the MCC remains in effect for the new loan. Copies of the MCC documents, including the reissue certification, must be maintained in the new loan file.
Note: Because the MCC is transaction specific, it does not have to comply with the Allowable Age of Credit Documents policy (see
, for additional information).
Mortgage Differential Payments Income
An employer may subsidize an employee’s mortgage payments by paying all or part of the interest differential between the employee’s present and proposed mortgage payments.
When calculating the qualifying ratio, the differential payments should be added to the borrower’s gross income.
The payments may not be used to directly offset the mortgage payment, even if the employer pays them to the mortgage lender rather than to the borrower.
The following table provides verification requirements for mortgage differential payment income.
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Verification of Income From Mortgage Differential Payments
Obtain written verification from the borrower’s employer confirming the subsidy and stating the amount and duration of the payments.
Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application.
If this income is used on a purchase transaction, current receipt is not required to be documented except as verified in the employer letter. For refinance transactions where the income is continuing with the new loan, the recent receipt must be in compliance with the Allowable Age of Credit Documents policy (see
, for additional information).
Non-Occupant Borrower Income
DU will consider a non-occupant borrower’s income as qualifying income for a principal residence with certain LTV ratio limitations.
For manually underwritten loans, the income from a non-occupant borrower may be considered as acceptable qualifying income. This income can offset certain weaknesses that may be in the occupant borrower’s loan application, such as limited income, financial reserves, or limited credit history. However, it may not be used to offset significant or recent instances of major derogatory credit in the occupant borrower’s credit history. The occupant borrower must still reasonably demonstrate a willingness to make the mortgage payments and maintain homeownership. If the income from a non-occupant borrower is used for qualifying, the LTV ratios are limited.
See
, for information about the maximum LTV, CLTV, and HCLTV ratios that apply when non-occupant borrower income is used for qualifying purposes for both DU and manually underwritten loans.
Notes Receivable Income
The following table provides verification requirements for notes receivable income.
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Verification of Income From Notes Receivable
Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application.
Obtain a copy of the note to establish the amount and length of payment.
Document regular receipt of income for the most recent 12 months.
Payments on a note executed within the past 12 months, regardless of the duration, may not be used as stable income.
Public Assistance Income
The following table provides verification requirements for public assistance income.
✓
Verification of Public Assistance Income
Document the borrower’s receipt of public assistance income with letters or exhibits from the paying agency that state the amount, frequency, and duration of the benefit payments.
Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application.
Section 8 Housing Choice Voucher Homeownership Program Payments
The Housing Choice Voucher Homeownership Program (more commonly known as Section 8) is also an acceptable source of qualifying income. There is no requirement for the Section 8 voucher payments to have been received for any period of time prior to the date of the mortgage application or for the payments to continue for any period of time from the date of the mortgage application.
✓
Verification of Section 8 Payment Vouchers
Determine the monthly payment amount from the public agency that issues the voucher.
Because this income is nontaxable, the lender should develop an adjusted gross income for the borrower. See
, for additional information.
Income from Unemployment Benefits
Income from unemployment benefits and any income from an employer-initiated action (such as furlough or layoff) are typically short-term in nature and can be considered when qualifying the borrower in the following scenarios:
The income has been consistently received for at least two years as verified by copies of the signed federal income tax returns that reflect the unemployment income is associated with seasonal employment. See , for additional information.
The income from unemployment benefits can be used in the calculation of financial resources that are required under Option 2 in Employment Offers and Contracts above.
The income from unemployment benefits may be used in qualifying a borrower for a high LTV refinance loan. See .
Restricted Stock Units and Restricted Stock Employment Income
Restricted stock units and restricted stock (referred to collectively as "restricted stock") are granted by an employer to its employees as a form of compensation based on either performance or time. They can be awarded as either stock or an equivalent cash value of the number of shares awarded and usually vest over a certain number of years. After they vest, the employee may sell the shares at the current price or hold the stock for future sale.
The following table provides verification requirements for restricted stock income.
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Verification of Restricted Stock Income
To be used as qualifying income, the restricted stock must have vested and been distributed to the borrower without restrictions.
For performance-based awards: A minimum history of 24 months restricted stock income from the current employer is recommended. Restricted stock income received for 12 to 24 months from the current employer may be considered as acceptable income if there are positive factors to offset the shorter income history such as
For time-based awards: A minimum history of 12 months restricted stock income from the current employer is required.
The lender must confirm continuance of income per Continuity of Income in
.
The lender must document all the following:
The calculation method for restricted stock income will vary depending on whether payment is made in shares or cash.
For income paid in shares:
For income paid in cash:
See Variable Income in
, for additional information about calculating variable income.
Retirement, Government Annuity, and Pension Income
The following table provides verification requirements for retirement, government annuity, and pension income.
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Verification of Retirement, Government Annuity, and Pension Income
Document current receipt of the income, as verified by one or more of the following:
If income from a government annuity or a pension account will begin on or before the first payment date, document the income with a benefit statement from the organization providing the income. The statement must specify the income type, amount and frequency of the payment, and include confirmation of the initial start date.
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. Eligible retirement account balances (from a 401(k), IRA, or Keogh) may be combined for the purpose of determining whether the three-year continuance requirement is met.
If a borrower’s retirement, annuity, or pension income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See
.
Royalty Payment Income
The following table provides verification requirements for royalty income.
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Verification of Income From Royalty Payments
Obtain copies of the
Confirm that the borrower has received royalty payments for at least 12 months and that the payments will continue for a minimum of three years after the date of the mortgage application.
Refer to the Variable Income section of
, for additional information.
Schedule K-1 Income
The following table provides verification of income requirements for borrowers who have less than 25% ownership of a partnership, S corporation, or limited liability company (LLC). For borrowers who have more than 25% ownership, lenders must follow the verification of income requirements for self-employed borrowers. See
for additional information.
✓
Verification of Schedule K-1 Income
The borrower must provide the most recent two years of
When only rental income is reported on Schedule K-1, the lender must obtain
Income reported on Schedule K-1 can only be considered if the lender obtains documentation verifying that
The lender is not required to analyze the viability of the business in accordance with self-employment requirements and may only use the borrower's proportionate share of earnings reflected on Schedule K-1 when calculating the borrower's income.
If the borrower has a two-year history of receiving “guaranteed payments to the partner” from a partnership or an LLC, these payments can be added to the borrower’s cash flow.
Social Security Income
The following table provides verification requirements for Social Security income.
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Verification of Social Security Income
Social Security income for retirement or long-term disability that the borrower is drawing from their own account/work record will not have a defined expiration date and must be expected to continue.
Social Security income based on another person's account/work record or from the borrower's own work record, but for the benefit of another (such as a dependent) may also be used in qualifying, provided the lender documents a 3-year continuance.
Document regular receipt of payments, as verified by the following, depending on the type of benefit and the relationship of the beneficiary (self or other) as shown in the table below.
Type of Social Security benefit
Borrower is drawing Social Security benefits from own account/work record
2
Social Security Administration's (SSA) Award letter,
SSA-1099,
Most recent signed federal income tax returns (or tax transcripts3), or
SSA Award letter,
SSA Award letter,
SSA-1099,
Most recent signed federal income tax returns (or tax transcripts3), or
SSA Award letter,
SSA Award letter,
Proof of current receipt
If a borrower’s Social Security income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See
.
Temporary Leave Income
Temporary leave from work is generally employee-initiated, short in duration and for reasons including, but not limited to maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or to the borrower's employer. Borrowers on temporary leave may or may not be paid during their absence from work.
Note: Mandatory leave initiated by an employer, such as a furlough or layoff, is not considered temporary leave regardless of an expected return to work date. For income from unemployment benefits received as a result of mandatory leave initiated by an employer, see Public Assistance Income above.
If a lender is made aware that a borrower will be on temporary leave at the time of the loan closing and that borrower's income is needed to qualify for the loan, the lender must determine allowable income and confirm employment as described below.
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Temporary Leave -- Employment Requirements
The borrower's employment and income history must meet standard eligibility requirements as described in Section B3–3.1, Employment and Other Sources of Income.
The borrower must provide written confirmation of their intent to return to work.
The lender must document the borrower’s agreed-upon date of return by obtaining, either from the borrower or directly from the employer (or a designee of the employer when the employer is using the services of a third party to administer employee leave), documentation evidencing such date that has been produced by the employer or by a designee of the employer.
Examples of the documentation may include, but are not limited to, previous correspondence from the employer or designee that specifies the duration of leave or expected return date or a computer printout from an employer or designee’s system of record. (This documentation does not have to comply with the Allowable Age of Credit Documents policy.)
The lender must receive no evidence or information from the borrower's employer indicating that the borrower does not have the right to return to work after the leave period.
The lender must obtain a verbal verification of employment in accordance with
. If the employer confirms the borrower is currently on temporary leave, the lender must consider the borrower employed.
The lender must verify the borrower's income in accordance with Section B3–3.1, Employment and Other Sources of Income. The lender must obtain
Requirements for Calculating Income Used for Qualifying
If the borrower will return to work as of the first loan payment date, the lender can consider the borrower's regular employment income in qualifying.
If the borrower will not return to work as of the first loan payment date, the lender must use the lesser of the borrower's temporary leave income (if any) or regular employment income. If the borrower's temporary leave income is less than their regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see
). The following are instructions on how to calculate the “supplemental income”:
Supplemental income amount = available liquid reserves divided by the number of months of supplemental income
Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
Number of months of supplemental income: the number of months from the first loan payment date to the date the borrower will begin receiving their regular employment income, rounded up to the next whole number.
After determining the supplemental income, the lender must calculate the total qualifying income.
Total qualifying income = supplemental income plus the temporary leave income
The total qualifying income that results may not exceed the borrower's regular employment income.
Regular income amount: $6,000 per month
Temporary leave income: $2,000 per month
Total verified liquid assets: $30,000
Funds needed to complete the transaction: $18,000
First payment date: July 1
Date borrower will begin receiving regular employment income: November 1
Supplemental income: $12,000/4 = $3,000
Total qualifying income: $3,000 + $2,000 = $5,000
For loan casefiles underwritten with DU, refer to
, for data entry guidance.
Note: These requirements apply if the lender becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the lender must not ask if they intend to take leave in the future.
Tip Income
The following table provides verification requirements for tip income.
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Obtain the following documents:
See
, for additional information.
Tip income may be used to qualify the borrower if the lender verifies that the borrower has received it for the last two years.
The lender must determine the amount of tip income that may be considered in qualifying the borrower. Refer to the Variable Income section of
, for additional information.
Trust Income
The following table provides verification requirements for trust income.
✓
The lender must...
Obtain one or more of the following trust verification documents to confirm the amount, frequency, type of income being received, and the date the trust was created:
Confirm the trust was established for 12 months or longer, unless all of the following requirements are met:
Trusts created in the previous 12 months using a borrower's eligible employment-related assets, as defined in Employment-Related Assets as Qualifying Income, may still be used as stable income but must meet the income calculation and all other requirements in Employment-Related Assets as Qualifying Income.
Confirm continuance of income per Continuity of Income in
. This confirmation 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.
If any assets from the trust are being used for down payment, closing costs, or reserves, those assets must be subtracted from the total amount before determining if the trust income meets the Continuity of Income requirements.
Requirements for Trust with Fixed Payments
Requirements for Trust with Variable Payments
Use the fixed payment amount from the trust verification documentation as the borrower's qualifying income, converting it to a monthly amount, as applicable.
Document current receipt of trust income with one month's bank statement or other equivalent documentation.
Calculate the qualifying income amount per Variable Income in
.
Document the following:
VA Benefits Income
The following table provides verification requirements for income from VA benefits.
Note: Education benefits are not acceptable income because they are offset by education expenses.
✓
Verification of VA Benefits Income
Document the borrower’s receipt of VA benefits with a letter or distribution form from the VA.
Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. (Verification is not required for VA retirement or long-term disability benefits.)
If a borrower's VA benefit income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See
.
An SSA Award letter may be used to document the income if the borrower is receiving Social Security payments or if the borrower will begin receiving payments on or before the first payment date of the subject mortgage as confirmed by a recently issued award letter.
Examples of how a borrower might draw Social Security benefits from another person’s account/work record and use the income for qualifying:
A borrower may be eligible for benefits from a spouse, ex-spouse, or dependent parents (the benefit is paid to the borrower on behalf of the spouse, etc.); or
A borrower may use Social Security income received by a dependent (a minor or disabled dependent).
If joint tax returns or tax transcripts include income that is not associated with a borrower on the loan transaction, the lender must obtain additional documentation supporting the amount of income from the SSA being used in qualifying, such as the SSA-1099.
Confirmation of three-year continuance does not require documentation that provides a defined expiration date and can be assessed by verifying the SSA's requirements related to the specific benefit(s) being paid. For example, if the SSA ties receipt of the benefits to the beneficiary's age, confirmation of a three-year continuance can be met by verifying that the beneficiary's age supports that benefit(s) will continue for at least three years from the date of the loan application.
SEL-2022-04 SEL-2021-08 SEL-2019-08 SEL-2018-09 SEL-2018-06
