How Fannie Mae Views Your Employment Income
Fannie Mae treats employed income as the foundation of most mortgage applications. The guidelines divide your earnings into categories based on how predictable they are. Your base salary gets the simplest treatment, while variable income like commissions faces much stricter requirements.
The key principle is stability. Fannie Mae wants to see that your income will continue at the same level for at least three years after you close on your home. This means they look backward to predict forward — your employment history becomes the crystal ball for your future earning power.
Say you work as a software engineer making $80,000 per year in base salary, plus you earn about $15,000 annually in overtime. Fannie Mae will treat these two income streams differently. Your base salary needs minimal documentation because it's predictable. The overtime requires a 2-year history and gets averaged because it fluctuates.
Employment History Requirements
Most borrowers need a 2-year employment history for their primary job. This doesn't mean you need to stay with the same employer — job changes within the same field often work fine if your income stayed consistent or increased.
Fannie Mae makes exceptions for shorter employment histories in specific situations. If you're returning to work after an extended absence, you can use your pre-absence employment history to meet the 2-year requirement. Recent graduates can combine school attendance with their new job to satisfy the history requirement.
Military members get special treatment. Active-duty service members don't need any employment history — their military service counts as stable employment from day one.
For second jobs or part-time work, you typically need a 2-year history with that specific employer. However, if you can show the secondary income replaces a previous full-time job at a similar income level, you might qualify with just 12-15 months of history.
Base Employment Income: The Simple Case
Base employment income includes your salary or regular hourly wages. If you're salaried, this is straightforward — your annual salary divided by 12 gives your monthly qualifying income.
Hourly workers qualify easily if their hours stay consistent. Say you work 40 hours per week at $25 per hour. Your lender calculates this as $25 × 40 × 52 ÷ 12 = $4,333 monthly income. Small variations in hours don't matter — clocking out a few minutes early won't hurt your qualification.
Some hourly positions have minimum required hours. A hospital nurse might work three 12-hour shifts per week as the minimum schedule. If your employer confirms this in writing and your paystubs support it, the lender can treat those 36 hours as guaranteed non-fluctuating income.
Required Documentation for Base Income
For your primary job, you need three pieces of documentation:
- Your most recent paystub showing year-to-date earnings
- Your W-2 from last year
- A verification of employment completed within 10 days of closing
If you work a second job, add another year of W-2s to prove the income's stability.
Your lender can substitute a written verification of employment for the paystub and W-2, but most prefer the actual documents because they show more detail.
The 10-day verification confirms you still work there and haven't taken a pay cut. This catches last-minute job changes that could derail your loan.
Fluctuating Income: Commissions, Bonuses, and Overtime
Variable income requires much more documentation and analysis. Fannie Mae needs to see a 2-year history of receiving this income before they'll count it toward your qualification.
Your lender averages the last two years of variable income, including the current year-to-date. Say you earned $20,000 in commissions last year and you're on track for $24,000 this year based on your year-to-date earnings. Your lender would average these amounts over the time period to calculate your monthly qualifying income.
The trend matters enormously. If your variable income increased or stayed steady, you're in good shape. If it declined by more than 10%, your lender must analyze why and determine if the current level is stable.
When Variable Income Gets Complicated
Declining variable income creates problems. If your commission income dropped by more than 10% from last year to this year, your lender can only use the current lower amount. They can't average in the higher previous year unless you can document that the decline was temporary and you've returned to previous levels.
Say your commission income was $30,000 in 2023 but only $20,000 in 2024. Your lender can only qualify you based on the $20,000 level unless you can prove the 2024 decline was due to a one-time event like a company reorganization or temporary market conditions.
Large increases also trigger scrutiny. If your variable income jumped by more than 30% year-over-year, your lender needs additional documentation to verify the increase is sustainable.
Special Income Types
Military personnel can count their base pay plus certain allowances. Housing allowances, flight pay, and hazard duty pay all qualify if they're likely to continue for three years.
Car allowances from your employer count as income if you've received them consistently for two years. The full allowance amount gets added to your qualifying income — you can't subtract it from your car payment.
Tips reported on your tax returns qualify with a 2-year history. If you receive cash tips that you report on IRS Form 4137, your lender needs those forms plus your complete tax returns for verification.
Employment Situations That Need Extra Documentation
Working for family members or anyone connected to your home purchase requires additional verification. Your lender needs your complete tax return from last year to confirm your income wasn't artificially inflated for the mortgage application.
Contract workers who receive 1099 forms face complex rules. If your business expenses are less than 5% of your gross receipts, Fannie Mae might treat you as an employee rather than self-employed. This is generally better because employee income rules are more lenient than self-employment requirements.
Union members who work for multiple employers throughout the year can combine all their W-2s and paystubs to show stable income, even if they switch job sites frequently.
Why These Rules Exist
Fannie Mae's employment income rules reflect decades of data about which borrowers successfully repay their mortgages. Stable employment with predictable income correlates strongly with loan performance.
The 2-year history requirement exists because one good year doesn't predict future performance. Variable income can swing dramatically based on economic conditions, company performance, or industry changes. Two years of history helps lenders distinguish between temporary good fortune and sustainable earning power.
The 3-year continuance requirement aligns with typical mortgage seasoning periods. Most loans that fail do so within the first few years, so Fannie Mae wants reasonable confidence that your income will persist through this critical period.
Common Pitfalls
Job changes during the mortgage process can derail your application even if your income stays the same. Your lender needs to reverify your employment, and any gap between jobs requires explanation and documentation.
Seasonal workers often struggle with the continuance requirement. If your job naturally ends each year, you need to document a pattern of finding similar work or receiving unemployment benefits to bridge the gap.
Commission-based borrowers sometimes get surprised by the averaging requirement. A great year followed by a mediocre year results in qualification based on the average, not the peak year.
Self-employed borrowers who receive some W-2 income and some 1099 income face complex calculations. Each income stream has different documentation requirements, and mixing them requires careful analysis.
References
For the official guidelines, see 5303.1: Employed income in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
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Original Freddie Mac Guideline Text
This section contains requirements and guidance related to:
Employment history requirements
Non-fluctuating employment earnings (base, entitlements, military reserve, National Guard)
Fluctuating employment earnings (base fluctuating hourly earnings, additional fluctuating earnings)
Employment/income characteristics – requirements and guidance
(a)
Requirements for all employed income
All employed income used for qualifying must meet the requirements and guidance of this chapter and
Section 5301.1
for all stable monthly income.
(i)
Stability and continuance of income
The Seller must determine that the amount of income used to qualify the Borrower is stable and complies with the requirements for each income type. All income must be expected to continue or have documented continuance for at least three years as described in this chapter. The Seller must analyze all income documentation while taking into consideration the characteristics of the employed income (e.g., employment source, earnings type, income type and stability of the employment history, including any gaps in employment).
A Borrower who has had different types of employment in the past may be considered to have stable income if the income amount has remained at a consistent level. When evaluating a Borrower who has frequently changed jobs, the Seller must focus on whether the changes have affected the Borrower’s ability to pay their obligations.
(ii)
Primary and secondary employment types
Primary employment is the primary source of the Borrower’s employed income whether derived from employment such as full-time employment, part-time employment, and/or seasonal employment.
Secondary employment is any type of employment (e.g., second part-time job or multiple jobs) that is in addition to the Borrower’s primary employment.
(b)
(i)
Primary employment
In most instances, the Borrower should have at least a two-year history of primary employment documented on
Form 65, Uniform Residential Loan Application
, and verified in accordance with
Topic 5300
.
For Borrowers who are active-duty members of the U.S. Armed Forces, a history of military employment is not required for the employment to be considered stable.
Tenure with the same employer or in a similar industry lends support to the analysis of employment stability.
When a Borrower has less than a two-year history of primary employment, the Seller must provide its justification for determining that the employment is stable, taking into consideration factors such as income and/or employment characteristics and the overall layering of risk factors, including the Borrower’s demonstrated ability to repay obligations.
Examples that may support less than a two-year history (see minimum history requirements below):
Example 1
: For a Borrower returning to the workforce after a period of extended absence, for any reason, documentation is provided to support a stable employment history that directly preceded the extended absence
Example 2
: For a Borrower new to the workforce, documentation is provided that supports the Borrower’s recent attendance at school or in a training program prior to their current employment
Minimum history requirements for base fluctuating hourly earnings:
For additional minimum history requirements (e.g., 12 months) for base fluctuating hourly earnings, refer to the history requirements in
Section 5303.1(d)
, below.
(ii)
Secondary employment
In most instances, the Borrower should have at least a two-year history of secondary employment for the employment to be considered stable. When a Borrower has less than a two-year secondary employment history but has at least a 12-month history, the Seller may be able to justify and determine the employment is stable.
Examples that may support less than a two-year history:
Example 1
:The Borrower previously held a job with base non-fluctuating earnings working 40 hours per week for multiple years; however, due to reasons such as position elimination, work force reduction, or illness, the Borrower is no longer employed at this job and now works at multiple part-time jobs that are similar in hours and pay, when combined, to the previous full-time job. Since the Borrower’s full-time employment ended 18 months ago, the length of employment at each part-time job is in the range of 13 to 15 months. In this scenario, the Seller may be able to justify an employment history of less than two years for the secondary and additional jobs provided the earnings are consistent and the Borrower has exhibited the ability to repay obligations.
Example 2
:The Borrower is employed as a school teacher. During the previous summer, the Borrower taught summer school and is now starting summer school teaching for the current year. Although the two-year history is not yet fully developed, given the job type and current employment situation, the Seller may be able to justify including the summer school income, provided an accurate qualifying amount can be established and documented based on the previous and current earnings. Additional documentation to determine the stable monthly income may be appropriate (e.g., how many classes, how much, is it similar to prior year).
(c)
Non-fluctuating employment earnings (base, military, additional fixed earnings)
Requirements for history, continuance, calculation and documentation for non-fluctuating employment earnings are outlined in the tables below. Additional documentation may be required to determine the stable monthly income amount. Refer to
Section 5303.1(e)
for additional documentation and requirements that may apply based on employment characteristics.
(i)
Base non-fluctuating employment earnings
Earnings type
: Base non-fluctuating employment earnings are stable and consistent earnings that may be salaried or hourly.
Base non-fluctuating earnings may include:
Military base (basic) pay
Non-exempt (hourly) earnings. The pay rate and number of hours are reflected on an ongoing consistent basis for each pay period and must be supported by the year-to-date (YTD) income. If the only reason the earnings fluctuate is because of additional employed income (e.g., overtime), the base earnings are still considered non-fluctuating.
Minor fluctuations in hours
Minor variations in base hours on paystubs (e.g., Borrower clocked out a few minutes early) are acceptable and may be treated as base non-fluctuating earnings when the variation is no more than an hour per week. Minor variations do not automatically render the base earnings as fluctuating if the historical earnings support the level of pay.
Example
: The pay frequency is weekly. The current YTD paystub shows 39.78 hours while the prior paystub shows 40 hours. The YTD income reasonably supports 40 hours per week of gross pay and the prior year W-2(s) support a similar amount of pay.
Exception for non-exempt earnings: primary employment earnings with minimum required hours
For Borrowers with primary employment earnings that fluctuate but have a position with a minimum number of required hours, the earnings may be considered non-fluctuating, and the minimum required hours are acceptable to use for gross pay when following requirements are met:
The Seller must obtain written documentation from the employer confirming the minimum required hours (i.e., written verification of employment (VOE), offer letter or equivalent documentation)
The documented minimum required hours must be supported by YTD income and prior year, as applicable
Only the minimum required hours may be considered non-fluctuating. The requirements for fluctuating employment earnings apply to any additional hours used to qualify the Borrower.
Example (minimum required hours):
The Borrower has been with the current employer as a nurse with a hospital for four months; prior to that, the Borrower was in nursing school. The written VOE verifies the Borrower works three 12-hour shifts each week, which is common for this profession, and the YTD earnings support at least this level of gross pay. Based on this, it is acceptable to consider these the minimum required hours and use 36 hours weekly gross pay for income calculation.
Base non-fluctuating employment earnings – primary and secondary employment
Employment history
Refer to the employment history requirements in
Section 5303.1(b)
, above.
Continuance
Must be likely to continue for at least the next three years
Documentation
Primary employment earnings: base non-fluctuating earnings
All of the following:
YTD paystub(s) documenting all YTD earnings
1
for the most recent calendar year
10-day pre-closing verification (10-day PCV)
Or all of the following:
Written VOE documenting all YTD earnings and the earnings for the most recent calendar year
10-day PCV
Secondary employment earnings: base non-fluctuating earnings
All of the following:
YTD paystub(s) documenting all YTD earnings
1
for the most recent two calendar years
10-day PCV
Or all of the following:
Written VOE documenting all YTD earnings and the earnings for the most recent two calendar years
10-day PCV
Calculation
For all income used to qualify the Borrower, the Seller must determine the pay frequency (weekly, bi-weekly, semi-monthly, monthly, quarterly, annually) to accurately analyze and calculate the stable monthly income. All documentation in the Mortgage file must support the Seller’s income analysis and calculation.
The following table describes the calculation methods the Seller must use to determine stable monthly income for base non-fluctuating employment earnings, taking into consideration the typical pay periods of weekly, bi-weekly, semi-monthly and monthly.
Calculation of base non-fluctuating employment earnings
Weekly
Multiply the weekly gross pay by 52 and divide by 12.
Bi-weekly (every two weeks)
Multiply the biweekly gross pay by 26 and divide by 12.
Semi-monthly (twice per month)
Multiply the semi-monthly gross pay by 24 and divide by 12.
Monthly
Use the monthly gross pay.
Annual base non-fluctuating salary paid out over less than 12 months per year (e.g., teachers)
Example
: If the annual salary is paid out over 10 months of the year, multiply the monthly base salary amount by 10 months and divide by 12.
1
Section 5302.2(b)
for W-2 form requirements and documentation that may be used in lieu of a W-2 form (e.g., year-end YTD paystub).
(ii)
Military earnings (base, entitlements, reserve, National Guard)
(A)
Military base (basic) pay
Base non-fluctuating earnings include military base (basic) pay. For members of the U.S. Armed Forces, active-duty pay is considered base non-fluctuating earnings.
Employment history
For Borrowers who are active-duty members of the U.S. Armed Forces, a history of military employment is not required for the employment to be considered stable.
Continuance
Must be likely to continue for at least the next three years
Documentation
YTD Military Leave and Earnings Statement
Or all of the following:
Written VOE documenting all YTD earnings
10-day PCV
Calculation
Refer to calculation guidance and requirements for base non-fluctuating employment earnings in
Section 5303.1(c)(i)
, directly above.
(B)
Military entitlements (e.g., flight or hazard duty, rations, clothing allowance or quarters allowance)
Military entitlements (e.g., flight or hazard duty, rations, clothing allowance or quarters allowance)
History of receipt
A history of receipt is not required for the income to be considered stable
Continuance
Must be likely to continue for at least the next three years
Documentation
YTD Military Leave and Earnings Statement
Or all of the following:
Written VOE documenting the current monthly fixed entitlement amount(s) and type(s)
10-day PCV
(C)
Military reserve and National Guard income
Military reserve and National Guard income
Continuance
Must be likely to continue for at least the next three years
All of the following:
YTD Military Leave and Earnings Statement
1
for the most recent calendar year
Or all of the following:
Written VOE documenting all YTD earnings and the earnings for the most recent calendar year
10-day PCV
12-month average
1
Section 5302.2(b)
for W-2 form requirements and documentation that may be used in lieu of a W-2 form (e.g., year-end Military Leave and Earnings Statement).
(iii)
Additional fixed employment earnings (automobile allowance, mortgage differential)
For the purposes of determining stable monthly income, additional fixed employment earnings are considered to be earnings that are based on a pre-determined and agreed upon fixed amount of pay that is fully documented, such as an automobile allowance or mortgage differential. Generally, additional employment earnings are received in connection with the primary or secondary employment.
For additional fixed employment earnings used to qualify the Borrower, the Seller must determine that the amount of income used to qualify the Borrower is stable and complies with the requirements below for each income type. All income must be expected to continue or have documented continuance for at least three years as described in this section.
(A)
Continuance
Must be likely to continue for at least the next three years
All of the following:
YTD paystub(s) documenting all YTD earnings
1
for the most recent two calendar years
10-day PCV
Or all of the following:
Written VOE documenting all YTD earnings and the earnings for the most recent two calendar years
10-day PCV
Calculation
Add the full amount of the allowance to the qualifying income.
Note: The Seller may not subtract the automobile allowance from the monthly automobile financing expense.
1
Section 5302.2(b)
for W-2 form requirements and documentation that may be used in lieu of a W-2 form (e.g., year-end YTD paystub).
(B)
History of receipt
A history of receipt is not required for the income to be considered stable.
Continuance
Must continue for at least three years from the Application Received Date
Documentation
Agreement from the employer stating the terms including the scheduled amount and duration of the payments.
The documentation must show that the payments are pursuant to an established, ongoing and documented employer program. The employer must not be an interested party to the transaction.
Calculation
Payments from the Borrower’s employer for all or part of the housing payment differential between the Borrower’s present and proposed Mortgage payment may be added to the qualifying income.
Note: The payments may not be used to offset the monthly housing payment amount used for qualification.
(d)
Fluctuating employment earnings (Base fluctuating hourly earnings, additional fluctuating earnings)
Requirements for history, continuance, calculation and documentation for fluctuating employment earnings are outlined in the tables below. Additional documentation may be required to determine the stable monthly income amount. Refer to
Section 5303.1(e)
for additional documentation and requirements that may apply based on employment characteristics.
(i)
Base fluctuating hourly employment earnings
Earnings type
: Base fluctuating hourly employment earnings are not pre-determined and may fluctuate each pay period.
Example 1
: The pay frequency is weekly. The current YTD paystub shows 37 hours. The prior pay period YTD paystub shows 31 hours. This is typically an indication that the base hours fluctuate.
Example 2
: The pay frequency is weekly. The paystub shows 37 hours at a pay rate of $30 per hour and reflects six months of YTD income. If the Borrower’s paystub shows 37 hours every week, the YTD earnings are approximately $28,860. However, the YTD base earnings on the paystub are $20,240. This income documentation shows fluctuating hourly earnings and additional documentation is necessary to determine otherwise.
Base fluctuating hourly employment earnings
Employment history
Refer to employment history requirements in
Section 5303.1(b)
, above.
In addition, when the Borrower’s employed income is derived from base fluctuating hourly employment earnings, the Borrower must have at least a 12-month history of employment. The required minimum 12-month history must be derived from one of the following:
The Borrower’s current fluctuating hourly employment
A combination of current and prior fluctuating hourly employment
A combination of current fluctuating hourly employment and prior salaried employment in a similar industry or job type that had an income level consistent with the current income level based on trend analysis described in this table in the row labeled “calculation method and trend analysis for consistent and increasing income trends” below.
Continuance
Must be likely to continue for at least the next three years
Documentation
Primary employment earnings: Base fluctuating hourly earnings
All of the following:
YTD paystub(s) documenting all YTD earnings
1
for the most recent calendar year
10-day PCV
Or all of the following:
VOE documenting all YTD earnings and the earnings for the most recent calendar year
10-day PCV
Secondary employment earnings: Base fluctuating hourly earnings
All of the following:
YTD paystub(s) documenting all YTD earnings
1
for the most recent two calendar years
10-day PCV
Or all of the following:
Written VOE documenting all YTD earnings and the earnings for the most recent two calendar years
10-day PCV
General requirements for calculating income
When calculating qualifying income, the Seller must:
Determine and consider the pay frequency (weekly, bi-weekly, semi-monthly, monthly, quarterly, annually) to accurately analyze and calculate the stable monthly income
Determine if the income trend is consistent, increasing or declining by comparing the YTD income to prior year(s) income and taking into consideration the length of receipt and degree of fluctuation
Evaluate the income trend and use the amount that is most likely to continue for the next three years
Ensure that all documentation in the Mortgage file supports the Seller’s income analysis and calculation
Calculation method and trend analysis for consistent and increasing income trends
Calculation method: consistent and increasing income trends
The Seller must average the most recent year(s) and YTD income. The amount of time averaged should be determined based on the requirements for history, documentation and other applicable factors such as time at the current employer, prior employment and consistency of the earnings level.
Note: If the increasing income is due to a pay raise, the Seller may use the calculation method as described in this table in the row labeled “pay raises” below.
Calculation examples for primary employment:
Current employer:
May 31
st
1
5.6%
17 months
(YTD + prior year)
1
If W-2s from the most recent two years are in the Mortgage file, only the most recent YTD and prior year earnings must be included in the average if the income is reasonably stable.
Example 2: Recent or frequent job changes
Current employer:
March 31
st
YTD average:
$5,000/month
25%
1
15 months
(YTD + prior year)
Previous employers:
Three employers in most recent 12 months; similar job types and industry
W-2 combined average:
$4,000/month
1
Trend analysis must be completed.
Exception:
The Seller may average using less than the most recent year(s) and YTD income if the income is supported by the employment history, historical earnings and documentation. This depends on individual circumstances, and the level of income must reasonably be expected to continue and represent stable monthly income.
Calculation examples for exception
Example 1: Current employer less than two years (likely fits within exception)
Current employment:
10 months
4%
Consistent
(reasonable based on job type and industry)
(current employment)
Previous employment:
Similar job type and/or industry
Example 2: Current employer less than two years (likely does not fit within exception)
Current employment:
YTD average:
$2,500/month
67%
N/A
Example likely does not fit within exception due to employment history and historical earnings
Previous employment:
W-2 combined average:
$1,500/month
Trend analysis: consistent and increasing income trends:
Degree of fluctuation ≤ 10%
Income trend is considered consistent.
No additional analysis or documentation is required when calculating the qualifying income.
Degree of fluctuation > 10% – ≤ 30%
No additional analysis or documentation is required when the increase is supported by the verification of pay raise described in this table in the row labeled “pay raises,” below, and/or the documented income breakdown described in the row labeled “documented income breakdown” in the table for bonus, commission, overtime and tips in
Section 5303.1(d)(ii)(A)
, below.
Otherwise, additional analysis is required, and additional documentation may be necessary to determine income stability and develop an accurate calculation of qualifying income. The analysis and documentation must support the amount of income used to qualify the Borrower.
Degree of fluctuation > 30%
Additional analysis is required, and additional documentation will likely be necessary to determine income stability and develop an accurate calculation of qualifying income. The analysis and documentation must support the amount of income used to qualify the Borrower.
When using an average with the YTD and most recent year, the degree of fluctuation is based on the increase between the YTD and the prior year
When using an average with the YTD and the prior two years, the degree of fluctuation is based on the increase between the YTD and the prior two years
Pay raises
Verification of pay raises and using pay increase in calculation of income
Merit, promotional or other types of increases in pay may justify using different averaging methods for fluctuating hourly earnings based on the application of the new pay rate to the average hours for the prior year and YTD.
While documentation to verify pay raises is not always required, it may be used to support a higher amount of qualifying income and/or support fluctuating hourly earnings when the degree of fluctuation exceeds 10%.
Verification method
: Use employed income documentation outlined in
Chapter 5302
, such as written VOEs and paystubs. Paystubs from the current or prior year that show the new and old rates of pay when the raise occurred and/or year-end paystubs will likely be necessary to complete this verification.
Calculation method
For consistent and increasing income trends, use one of the options below:
Option 1
: Average the most recent year(s) and YTD income, as described in this table in the row labeled “calculation method and trend analysis for consistent and increasing income trends” above
Option 2
: Apply the current pay rate to the average number of hours during the prior year and the current year, provided the hours during the prior year and the current year are consistent or increasing, and documented
Calculation: Excluding time periods based on a specific event unlikely to recur
Calculation: Excluding time periods based on a specific event unlikely to recur
In certain instances, income may be calculated using a shorter time period; however, the Seller must provide a written justification and/or documentation supporting the months used in the calculation. When excluding a time period based on a specific event that is unlikely to recur, at least 12 months of stable monthly income must still be used in the calculation. These 12 months do not need to be consecutive (i.e., the period impacted by the non-recurring event can be excluded).
Example:
The Borrower has a 10-year employment history as a restaurant manager. The June 2025 YTD paystub, 2024 W-2 and 2023 W-2 have been provided.
While the June 2025 YTD paystub and 2023 W-2 earnings support approximately $60,000 in base earnings per year, the 2024 W-2 earnings are low at $30,000.
Documentation in the file verifies that the restaurant was closed for renovations from April through September of 2024, which supports a justifiable one-time event and the resulting reduced earnings, so it is reasonable to exclude the 2024 earnings from the calculation and average the 2025 YTD and 2023 earnings over 18 months or take the 2024 earnings for 6 months and 2025 YTD earnings of 6 months to get an average across 12 earning months (ignoring the specific event).
Calculation method and trend analysis for declining trend
Calculation method and trend analysis: declining trend
The Seller must use the YTD income and must not include the previous higher level unless there is documentation of a one-time occurrence (e.g., injury) that prevented the Borrower from working or earning full income for a period of time and evidence that the Borrower is back to the income amount that was previously earned.
If the decline between the prior year(s) and/or YTD earnings exceeds 10%, the Seller must conduct further analysis, and additional documentation may be necessary to determine whether the income is currently stable. This analysis must include the reason for the declining trend, and support that the current income has stabilized.
1
Section 5302.2(b)
for W-2 form requirements and documentation that may be used in lieu of a W-2 form (e.g., year-end YTD paystub).
(ii)
Additional fluctuating employment earnings (e.g., bonus, commission, overtime, tips, unemployment)
For the purposes of determining stable monthly income, additional fluctuating employment earnings are considered to be earnings that fluctuate on a regular basis, often based on factors such as hours, job type and performance. Fluctuating earnings may include, but are not limited to, income types such as commissions, overtime, bonus, tips, and unemployment compensation associated with seasonal employment. For additional fluctuating employment earnings to qualify the Borrower, the Seller must determine that the amount of income used to qualify the Borrower is stable and complies with the requirements below for each income type. All income must be expected to continue or have documented continuance for at least three years as described in this section.
Income history and stability – requirements and guidance
The stability of fluctuating income is primarily determined based on historical earnings, so it is imperative that a sufficient income history has been established. For this reason, most income types that fluctuate have a history requirement of two years. In certain instances, a shorter history may still be considered stable if the Seller provides a written analysis and sufficient supporting documentation justifying the determination of stability. When making this determination, the Seller must take into consideration factors such as income and/or employment characteristics and the overall layering of risk factors, including the Borrower’s demonstrated ability to repay obligations. The income history must be at least 12 months.
(A)
Bonus, commission, overtime, tips (reported by the employer)
Bonus, commission, overtime, tips (reported by the employer)
Two years, consecutive
Exception: A history of less than two years, but not less than one year, may be acceptable. Refer to income history and stability requirements and guidance in
Section 5303.1(d)(ii)
, above.
Continuance
Must be likely to continue for at least the next three years
All of the following:
YTD paystub(s) documenting all YTD earnings
1
for the most recent two calendar years
10-day PCV
Or all of the following:
Written VOE documenting all YTD earnings and the earnings for the most recent two calendar years
10-day PCV
General requirements for calculating income
When calculating qualifying income, the Seller must:
Determine and consider the pay frequency (weekly, bi-weekly, semi-monthly, monthly, quarterly, annually) to accurately analyze and calculate the stable monthly income
Determine if the income trend is consistent, increasing or declining by comparing the YTD income to prior year(s) income and taking into consideration the length of receipt and degree of fluctuation
Evaluate the income trend and use the amount that is most likely to continue for the next three years
Ensure that all documentation in the Mortgage file supports the Seller’s income analysis and calculation
Example (pay frequency)
: The Borrower received an annual bonus in February in both the prior year and current year as evidenced by the written VOE dated in March of the current year. The bonus amounts are consistent based on the income trend analysis. Because the bonus is paid on an annual basis, the amounts received in the current and prior year must be averaged over a 2-year period. It is inaccurate to average the prior year and YTD number of months on the income documentation (e.g., 15-month average).
Calculation method and trend analysis for consistent and increasing income trends
Calculation method: consistent and increasing trends
The Seller must average the most recent years and YTD income over the applicable number of months of required history and documentation.
Trend analysis: consistent and increasing trends
Refer to the row labeled “Calculation method and trend analysis for consistent and increasing income trends” in the table for base fluctuating hourly earnings type in
Section 5303.1(d)(i)
, above.
Calculation: Excluding time periods based on a specific event unlikely to recur
Calculation: Excluding time periods based on a specific event unlikely to recur
In certain instances, income may be calculated using a shorter time period; however, the Seller must provide a written justification and/or documentation supporting the months used in the calculation. When excluding a time period based on a specific event that is unlikely to recur, at least 12 months of stable monthly income must still be used in the calculation. These 12 months do not need to be consecutive (i.e., the period impacted by the non-recurring event can be excluded).
Example:
The Borrower has a 10-year employment history as a server earning tips. The June 2025 YTD paystub, 2024 W-2 and 2023 W-2 have been provided.
While the June 2025 YTD paystub and 2024 W-2 earnings support approximately $60,000 in tip income per year, the 2023 W-2 earnings appear low at $30,000.
Documentation in the file verifies that the restaurant was closed for renovations from April through September of 2023, which supports the reduced tip income, so it is reasonable to exclude the 2023 earnings from the calculation and average the most recent 18 months of income.
Documented income breakdown
Documented income breakdown (e.g., bonus, overtime, commissions)
A documented breakdown between the base non-fluctuating earnings or base fluctuating hourly earnings and the additional fluctuating employment earnings (e.g., bonus, overtime, commission, tips) ensures the most accurate analysis and calculation of stable monthly income.
While a documented breakdown is not always required, one may be used to support a higher amount of qualifying income, verify bonus pay frequency, and/or support fluctuating income when the degree of fluctuation exceeds 10%.
Verification method
: Use employed income documentation outlined in
Chapter 5302
such as written VOEs and/or year-end and current YTD paystubs that show the breakdown between the earnings type and additional employment earnings (e.g., overtime, bonus, commissions).
Calculation method and trend analysis for declining trends
Calculation method and trend analysis: declining trend
Refer to the row labeled “Calculation method and trend analysis for declining trends” in the table for base fluctuating hourly earnings type in
Section 5303.1(d)(i)
, above.
1
Section 5302.2(b)
for W-2 form requirements and documentation that may be used in lieu of a W-2 form (e.g., year-end YTD paystub).
(B)
Tip income – cash and charge tips reported on Internal Revenue Service (IRS) Form 4137
Tip income – Cash and charge tips reported on IRS Form 4137
Two years, consecutive
Exception: A history of less than two years, but not less than one year, may be acceptable. Refer to income history and stability requirements and guidance in
Section 5303.1(d)(ii)
, above.
Continuance
Must be likely to continue for at least the next three years
Documentation
The Mortgage file must contain all of the following:
IRS Form 4137 for the most recent two years
Complete federal individual income tax returns covering the most recent two-year period
10-day PCV
Calculation
Refer to requirements for calculating income in the table for bonus, commission, overtime and tips in
Section 5303.1(d)(ii)(A)
, above.
(C)
Unemployment compensation associated with seasonal employment
Unemployment compensation associated with seasonal employment
Two years, consecutive
Exception: A history of less than two years, but not less than one year, may be acceptable. Refer to income history and stability requirements and guidance in
Section 5303.1(d)(ii)
, above.
Continuance
Must be likely to continue for at least the next three years
Documentation
Proof of receipt of unemployment compensation for the most recent two-year period (e.g., IRS Form 1099-G(s) and/or equivalent documentation)
Calculation
Refer to requirements for calculating income in the table for bonus, commission, overtime and tips in
Section 5303.1(d)(ii)(A)
, above.
(D)
Restricted stock (RS) and restricted stock units (RSUs)
(I)
RS and RSU subject to performance- based vesting provisions
Performance-based RS and RSU are RS or RSU with a vesting schedule contingent on corporate and/or individual performance.
RS and RSU subject to performance-based vesting provisions
Two years, consecutive
Exception: A history of less than two years, but not less than one year, may be acceptable. Refer to income history and stability requirements and guidance in
Section 5303.1(d)(ii)
, above.
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
All of the following:
YTD paystub(s) documenting all YTD earnings, including payout(s) of RS or RSU
1
for the most recent two calendar years
10-day PCV
Or all of the following:
Written VOE documenting all YTD earnings (including payout(s) of RS or RSU) as well as earnings for the most recent two calendar years
10-day PCV
Employment and income verifications obtained through a third-party verification service provider as described in
Section 5302.3
are permitted, provided that the documentation clearly identifies and distinguishes the payout(s) of RS/RSU.
The Mortgage file must also include the following additional documentation:
Evidence the stock is publicly traded
Documentation verifying that the vesting provisions are performance-based (e.g., RS and/or RSU agreement, offer letter)
Vesting schedule(s) currently in effect detailing past and future vesting
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, include the number of vested shares or its cash equivalent distributed to the Borrower (pre-tax)
Documentation of the 200-day simple moving average stock price
Calculation
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 documented 200-day simple moving average stock price by the total number of vested shares distributed (pre-tax) to the Borrower in the past two years, then divide by 24.
Example:
If 200 vested shares were distributed (pre-tax) in the past two years and the documented 200-day simple moving average stock price 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.
Exception:
If the Borrower has not received the RS or RSU income from their current employer for a full 24 months, the Seller may calculate the monthly income using the actual number of months received if supported by a written analysis and documented compensating factors (e.g., a history of receipt of RS or RSU income for the previous five years from a prior employer). In all cases, the Borrower must have a minimum history of receipt of 12 months with their current employer, as specified above, and the calculated monthly income used for qualifying may not be based on less than 12 months.
1
Section 5302.2(b)
for W-2 form requirements and documentation that may be used in lieu of a W-2 form (e.g., year-end YTD paystub).
(II)
RS and RSU subject to time-based vesting provisions
Time-based RS and RSU are RS or RSU with a pre-determined vesting schedule contingent only on the Borrower’s continued employment.
RS and RSU subject to time-based vesting provisions
One year
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
Recurring awards must be likely to continue for at least the next three years.
Nonrecurring awards (e.g., a one-time award) must have at least three years’ vesting and distribution remaining on the vesting schedule from the Application Received Date.
All of the following:
YTD paystub(s) documenting all YTD earnings, including payout(s) of RS or RSU
1
for the most recent calendar year
10-day PCV
Or all of the following:
Written VOE documenting all YTD earnings (including payout(s) of RS or RSU) as well as earnings for the most recent calendar year
10-day PCV
Employment and income verifications obtained through a third-party verification service provider as described in
Section 5302.3
are permitted, provided that the documentation clearly identifies and distinguishes the payout(s) of RS/RSU.
The Mortgage file must also include the following additional documentation:
Evidence the stock is publicly traded
Documentation verifying that the vesting provisions are time-based (e.g., RS and/or RSU agreement, offer letter)
Vesting schedule(s) currently in effect detailing past and future vesting
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, include the number of vested shares or its cash equivalent distributed to the Borrower (pre-tax)
Documentation of the 200-day simple moving average stock price
Calculation
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 documented 200-day simple moving average stock price by the number of vested shares distributed (pre-tax) to the Borrower in the past year, then divide by 12.
Example:
If 50 vested shares were distributed (pre-tax) in the past year and the documented 200-day simple moving average stock price 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.
1
Section 5302.2(b)
for W-2 form requirements and documentation that may be used in lieu of a W-2 form (e.g., year-end YTD paystub).
(e)
Employment/income characteristics requirements and guidance
For all employment and/or income characteristics below, the Seller must determine whether the employment and/or income represents primary or secondary employment and/or income and use the applicable requirements for history, continuance, earnings type, documentation and calculation in this chapter and in conjunction with
Chapters 5301
and
5302
, unless specifically stated otherwise. For certain employment and/or income characteristics, additional documentation and/or analysis may be needed, as described below.
Full-time and part-time employment
Full-time and part-time employment may be either primary or secondary employment, and may consist of base non-fluctuating earnings, base fluctuating hourly earnings and/or additional employment earnings.
Seasonal employment
Seasonal employment may be primary employment (e.g., highway construction and road work in colder regions) or secondary employment (e.g., educators teaching summer school). The earnings may include base non-fluctuating earnings, base fluctuating hourly earnings and/or additional employment earnings.
When using unemployment income associated with the seasonal employment as stable monthly income:
A documented two-year history of seasonal employment and income receipt is required, and
The requirements for unemployment income associated with seasonal employment in
Section 5303.1(d)(ii)(C)
must be met
Union members
Certain union members may work in industries where they may switch employers frequently and the union facilitates the next position. In that case, the Borrower may have multiple YTD paystubs and W-2s, all of which can be used for the verification and calculation of stable monthly income.
The Borrower’s earnings may be comprised of base non-fluctuating earnings, base fluctuating hourly earnings and/or additional employment earnings.
A Borrower may exhibit a stable and consistent employment and income history, regardless of the number of employers.
The Borrower may or may not be in between employers at the time of closing.
If the Seller determines that the Borrower’s employment and income history is stable and it is documented that the Borrower has multiple jobs as described above, it may be acceptable to obtain the 10-day PCV (refer to
Section 5302.2(d)
) from the union. The Seller must make this determination based on a review of all employment and income characteristics.
None
Borrower employed by a family member or by the property seller, real estate broker or other interested party to the transaction
When a Borrower is employed by a family member or by an interested party to the transaction, the employment and income is not arm’s length. Due to the increased layering of risk inherent in non-arm’s length employment, additional third-party validation supporting the current income level is necessary.
Complete signed federal individual income tax return or IRS wage and income transcripts for the most recent year. This documentation must validate the prior year earnings from current employment and support the current income level. If the current income level is not supported, the Seller may use the validated income amount from the prior year as qualifying income.
Employed income from a foreign source
When a Borrower receives employed income from a foreign source, the income may be considered for qualifying income if the income is reported on the Borrower’s U.S. federal individual income tax return for the most recent year, in addition to meeting the requirements in this chapter.
Chapter 5305
for all other non-employment/non-self-employment income from a foreign source.
Complete signed U.S. federal individual income tax return for the most recent year
Employment contracts
Employment contracts in the educational industry:
It is common for Borrowers who work in the educational industry, such as teachers, to be employed under renewable or term employment contracts.
For the educational field, if the Borrower provides an annually renewable or term contract, it is reasonable to consider continuance of receipt, provided the Seller does not have knowledge or documentation to the contrary.
None
Employment contracts in other industries:
If an employment contract is provided, it may be considered for the purposes of determining stable monthly income.
When making the determination of employment history, income stability and the monthly income amount, the Seller must take into consideration factors such as the following:
Whether employment contracts are reasonably common to the particular employment field and/or region
The pay structure outlined within the terms of the contract
Whether the Borrower has demonstrated the ability to maintain consistent employment and income with this form or a similar form of pay structure over the most recent two years
A documented two-year history of income and employment in the same or a similar employment field or industry when the terms of the employment contract do not include a base non-fluctuating pay structure
Temporary help services employment
Some contract firms and temporary staffing firms contract out the services of their employees to other employers.
When making the determination of employment history, income stability and the monthly income amount, the Seller must take into consideration factors such as whether the Borrower has demonstrated the ability to maintain steady and continuous employment and income with this employment structure over the most recent two-year period.
W-2 forms from the contract and/or temporary staffing firm for the most recent two-year period
Income reported on IRS Form 1099 for services performed
At times, Borrowers receive IRS Form 1099(s) for services performed; this pay structure is often referred to in terms such as contractor or contingent worker.
Income received on IRS Form 1099 for services performed may be reported on Schedule C and may represent a sole proprietorship. The Seller must treat this income as either:
Self-employed income in accordance with the requirements and guidance in
,
OR
Non-self-employed income in accordance with the requirements in this section if the IRS Schedule C from the most recent calendar year tax return evidences all of the following:
Gross receipts or sales = total amount(s) reported on the IRS Form 1099(s)
Total expenses are < 5% of gross receipts or sales, after deducting non-cash expenses (e.g., depreciation)
Cost of goods sold = $0
12-month history of 1099 income and reported expenses is present
Exception: If the above expense factor is not met but expenses are within a close range (e.g., 6%), the Seller may perform additional analysis to determine whether income reported on Schedule C remains characteristic of non-self-employed income. Factors the Seller may consider when making this determination include, but are not limited to:
The principal business or profession,
Gross receipts or sales,
The type and level of expenses reported
If the Seller determines that the Borrower is a sole proprietor, refer to the self-employed income requirements and guidance in
Chapter 5304
.
Minimum documentation – all of the following:
All IRS Form 1099s for services performed for the most recent two-year period, and
YTD paystubs and/or other equivalent and reasonably reliable third-party documentation (e.g., YTD earnings statements or evidence of payments for services performed) documenting YTD income received by the Borrower
Pages 1 and 2 of the Borrower’s federal individual income tax returns, and the applicable schedules (i.e., Schedule C, Schedule 1), covering the most recent one-year period
History of receipt
: Most recent two years; however, in certain instances, a shorter history of income with this pay structure may still be considered stable if the Seller provides a written analysis and sufficient supporting documentation justifying the determination of stability (e.g., a prior history of employment earnings at a similar level). In no event may the history of receipt for this pay structure documented on the tax returns be less than 12 months.
Continuance
: Must be likely to continue for at least the next three years
Calculation
: Average must be based on the required and documented history of receipt and support a consistent level of income in accordance with the requirements of
Section 5301.1(c)
. The 1099 income must be reduced by the expenses (excluding non-cash items) reported on Schedule C. Apply an average of the verified expenses to the 1099 income without verified expenses.
Scenario
: Borrower has an 18-month history of documented 1099 income, with 12 months of income and expenses reflected on the most recent Schedule C and reasonably reliable verification of YTD income for the most recent 6 months. Prior employment (W-2) for 5 years with similar income level and employment field.
1099(s) reported as gross receipts/sales:
(+) $100,000
Less
: Schedule C Expenses (less non-cash expenses)
(-) $4,000 (4%)
(most recent year Schedule C)
$96,000
Verified YTD 1099 income (6 months):
(+) $50,000
Less
: 4% expense rate (based on most recent year Schedule C)
(-) $2,000 (4%)
(Current YTD)
$48,000
: $144,000
(combined subtotals)
/ 18 months
$8,000/month
Stable monthly income
: The Seller must determine if more information and/or documentation is needed to support and justify the stable monthly income based on the individual circumstances.
Pre-closing verification
: Sellers are encouraged to complete a pre-closing verification confirming that the Borrower continues to perform services for the provider(s) of the 1099 income as close to the Note Date as possible.
Borrowers with business ownership interest(s) less than 25%
For use of ordinary income (loss) or guaranteed payments for services reported on IRS Schedule K-1 as stable monthly qualifying income, the Seller must meet either:
, or
All requirements in this section in conjunction with the general requirements and guidance in
Section 5301.1
and
Chapter 5302
The Borrower should not have an ownership interest of 25% or more in any business.
When using ordinary business income for qualification, the historical cash distributions must be reasonably consistent with the ordinary business income reported on the K-1s.
Note: For use of W-2 income, the Seller must meet the requirements of this chapter or
Chapter 5304
for self-employed income; the additional requirements in this row do not apply.
Schedule K-1 income from partnerships and S corporations
Minimum documentation – all of the following:
Schedule K-1s for the most recent two calendar years for partnerships and S corporations
Documentation of all YTD income must be obtained if available (e.g., most recent YTD paystub or equivalent). If YTD information is not attainable (e.g., due to year-end payment structures), the Seller may document and justify the income stability without this information.
The Schedule K-1(s) must evidence less than 25% ownership interest for the individual Borrower
Verification of current existence of business in accordance with
History of receipt:
: Most recent two years
Guaranteed payments for services
: Most recent two years; however, in certain instances, a shorter history may still be considered stable if the Seller provides a written analysis and sufficient supporting documentation justifying the determination of stability (e.g., recently changed from an employee of the same firm to a partner with a nominal ownership interest). In no event may the history be less than 12 months.
Continuance
: Must be likely to continue for at least the next three years
Calculation
: Average must be based on the required and documented history of receipt and support a consistent level of income in accordance with the requirements of
Section 5301.1(c)
.
Stable monthly income
: The Seller must determine if more information and/or documentation is needed to support and justify the stable monthly income based on the individual circumstances.
