What Fannie Mae Considers Stable Monthly Income
Fannie Mae defines stable monthly income as your verified gross monthly income from acceptable sources that can reasonably be expected to continue for at least three years. The key word here is "stable" — both the source and the amount must show consistency.
Your lender must verify that your income meets two tests: stability and continuance. Stability means your earnings have been consistent over time. Continuance means the income will likely continue for at least three years after you close on your home.
Say you work as a software engineer earning $80,000 per year in base salary. This income is stable because you receive the same amount each month, and it's likely to continue because you have steady employment. Your lender can use this full amount for qualification.
Now consider a real estate agent whose income varies significantly. Last year she earned $95,000, but the year before only $60,000. Her lender will need to analyze whether this income is truly stable or if the fluctuation creates too much risk.
The Two-Year History Requirement
For most variable income sources, Fannie Mae requires a two-year history of consistent earnings. This applies to commissions, bonuses, overtime, tips, and self-employment income.
Your lender will average your income over the two-year period, but they won't automatically use that average. If your income declined significantly in the most recent year, they may not be able to use it at all.
Consider a sales manager who earned $120,000 two years ago and $110,000 last year. The lender would likely average these to $115,000 annually, or about $9,583 per month. But if the same person earned $120,000 two years ago and only $85,000 last year, the declining trend might disqualify this income entirely.
Income That Doesn't Need Continuance Documentation
Some income types are considered "likely to continue" without additional documentation. These include your base employment salary, military pay, and regular self-employment income.
For these income sources, your lender assumes continuance unless they have specific knowledge that the income will stop. They don't need a letter from your employer promising to keep paying you for three years.
However, if your lender knows something that contradicts continuance, they must investigate further. If you mention during the application that your company is downsizing your department, your lender must evaluate whether your job is secure.
Income Requiring Documented Continuance
Other income types require specific documentation proving they'll continue. These include alimony payments, trust income, notes receivable, and certain retirement distributions.
For alimony, you need the divorce decree or separation agreement showing how long payments will continue. If the payments end in two years but you need a 30-year mortgage, your lender cannot use this income.
Trust income requires documentation of the trust terms. A trust that pays $2,000 monthly for life can be used for qualification. A trust that terminates in five years might not qualify for a 30-year loan.
Required Documentation and Analysis
Your lender must include a written analysis in your loan file explaining how they calculated your qualifying income and why they determined it's stable. This isn't just a checkbox exercise — it's a detailed evaluation.
The analysis must cover the calculation method and the rationale for stability. For straightforward salary income, the calculation is obvious from your pay stubs. For complex income like varying commissions or rental properties, your lender must show their work.
All supporting documents must stay in your loan file. This includes tax returns, pay stubs, bank statements, employment verification letters, and any other evidence used to establish your income.
What Documents You Need to Prepare
The specific documents depend on your income type, but most borrowers need recent pay stubs, tax returns for the past two years, and employment verification.
For salary employees, gather your most recent pay stub and W-2 forms for the past two years. Your lender will also verify your employment directly with your employer.
Self-employed borrowers need personal and business tax returns for two years, including all schedules. You may also need profit and loss statements, business bank statements, and a CPA letter explaining your income.
Commission-based workers need pay stubs showing year-to-date commission earnings, W-2 forms, and possibly 1099 forms if you receive commissions from multiple sources.
Common Problems That Trip Up Borrowers
Income that fluctuates significantly can create qualification challenges. If your commission income dropped more than 20-25% from one year to the next, your lender may not be able to use it.
Cryptocurrency payments cannot be used for qualification, even if you receive them regularly. If part of your compensation comes in Bitcoin or other digital currencies, that portion won't count toward your qualifying income.
Recent job changes can complicate income verification, especially if you moved from salary to commission or started receiving different types of variable pay. Your lender needs to establish that your new income pattern is stable.
The Three-Year Continuance Test
Every income source must pass the three-year test — your lender must reasonably expect it to continue for at least three years after closing. This requirement shapes how lenders evaluate different income types.
Temporary income sources like unemployment benefits typically don't qualify because they're designed to be short-term. Contract work might qualify if you have a history of consistent contract renewals, but a single six-month contract won't meet the continuance requirement.
Retirement income usually qualifies easily because Social Security and pension payments are designed to continue for life. But early retirement distributions from 401(k) accounts might not qualify if the account balance won't support three years of withdrawals.
Special Considerations for Alimony
If you pay alimony, it reduces your qualifying income when more than 10 months of payments remain. This is different from child support, which is handled under debt-to-income calculations.
The alimony reduction applies to your gross monthly income before your lender calculates your debt-to-income ratio. If you earn $8,000 monthly and pay $1,500 in alimony with two years remaining, your qualifying income becomes $6,500 monthly.
Alimony you receive can be added to your qualifying income, but you need documentation showing the payments will continue for at least three years. The divorce decree must specify the duration and amount of payments.
References
For the official guidelines, see 5301.1: General requirements for all stable monthly income in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains information and guidance related to:
Overview of stable monthly income
General requirements for all stable monthly income
Income stability and history requirements
(a)
Topic 5300
provides requirements and guidance for the determination of stable monthly income. The Seller must determine when additional analysis and documentation is needed to support the determination of stable and consistent monthly income.
(b)
General requirements for all stable monthly income
Stable monthly income:
Stable monthly income is the Borrower’s verified gross monthly income from all acceptable and verifiable sources that can reasonably be expected to continue for at least the next three years. For each income source used to qualify the Borrower, the Seller must determine that both the source and the amount of the income are stable, with a consistent level of earnings.
The income used to qualify the Borrower (whether or not specifically addressed as an income source or type in
Topic 5300
) and the documentation in the Mortgage file must be evaluated for stable monthly income qualification requirements and must meet the requirements of
Topic 5300
.
Income that does not meet these requirements or is not calculated correctly may invalidate the Loan Product Advisor
®
Risk Class on the Feedback Certificate.
Cryptocurrency:
Income that is paid to the Borrower in cryptocurrency may not be used for qualification.
Written analysis:
The Seller must include a written analysis of the income and amount in the Mortgage file. A written analysis includes topics such as:
The calculation used to determine the amount of the qualifying income, unless the qualifying income can be clearly derived from documentation in the Mortgage file (e.g., Social Security pre-determined payment amounts, annual salary); and
The rationale for determining that the source and the amount of the qualifying income are stable, including any rationale applicable to the stability, history, calculation and continuance of the income
Mortgage file documentation:
All documentation used to establish stable monthly income must be retained in the Mortgage file.
(c)
Income stability and history requirements
The Seller must consider the length of history of the income and whether the earnings have been consistent. When evaluating stability of income based upon historical receipt, additional layering of risk may be present depending upon the degree of income fluctuation. As a result, the Seller must determine when additional documentation (e.g., an additional year of earnings history) is necessary to support income stability.
In most instances, a two-year history of receiving a consistent level of income is required for the income to be considered stable and used for qualifying. While the source of income may vary, the Borrower must have a consistent level of income despite changes in the sources of income.
(d)
Income continuance requirements
For all income used to qualify the Borrower, the Seller must determine whether the income is reasonably expected to continue. This determination must focus on the Borrower’s past employment/self-employment history, history of receipt of other income and the probability of continued consistent receipt of the income used to qualify the Borrower. At a minimum, the Seller must base the determination on the requirements of
Topic 5300
and any other documentation contained in the Mortgage file. Additional documentation may be required, as described in
Section 5302.1
.
The Seller must not consider income for qualifying the Borrower if the Seller has knowledge, information or documentation that contradicts a reasonable expectation of continuance or probability of consistent receipt over at least the next three years.
Income continuance categories and tables
Continuance of income is categorized as follows:
Income and earnings types typically without documentable continuance (likely to continue) (
)
Income types with documentable continuance (
)
Income types that may or may not have documentable continuance, depending upon the source (e.g., government program, private insurer) and terms of the specific income type (e.g., retirement, long-term disability) (
)
(i)
Income and earnings types typically without documentable continuance (likely to continue)
Table A:
Income and earnings types typically without documentable continuance
Base employment earnings
Military earnings (base, entitlements, Reserve, National Guard)
Bonus, commission, overtime and tip earnings
Restricted stock (RS) and restricted stock units (RSU) subject to performance-based vesting provisions
Recurring RS and RSU awards subject to time-based vesting provisions
Automobile allowance
Unemployment (associated with seasonal employment)
Income must be likely to continue for at least the next three years.
The Seller is not required to obtain documentation to verify income continuance, absent any knowledge, information or documentation that the income is no longer being received or is likely to cease.
When the Seller has knowledge or information that the income may not be reasonably expected to continue, the Seller must conduct additional evaluation and/or obtain documentation in order to determine if the income can be used.
Example (Seller knowledge):
If a Borrower has been receiving overtime or bonuses, but the Seller has information or documentation evidencing that the income is already discontinued or will be discontinued due to the completion of a project or termination of a bonus program, the “likely to continue” requirement would not be met, and the income cannot be used for qualification purposes.
(ii)
Income types with documentable continuance
For income types with documentable continuance, the documentation requirements for each individual income type listed within
Topic 5300
provide the minimum documentation required in order for the Seller to verify income continuance for at least three years.
Table B:
Income types with documentable continuance
1
(Refer to
Sections 5303.1
and
5305.1
Royalty payments (one-year history)
Nonrecurring RS and RSU awards subject to time-based vesting provisions
Trust income (fixed payment)
Alimony, child support and/or separate maintenance
(Refer to
)
Homeownership Voucher Program (HOV)
Document duration of HOV term limit for assistance
(Refer to
)
(Refer to
)
Dividend and interest
Retirement account distributions as income
1
Highlights of the requirements from the individual income types are provided for illustrative purposes only. Refer to the sections shown above for complete requirements.
(iii)
Income types that may or may not have documentable continuance
Table C:
Income types that may or may not have documentable continuance
Certain income types are associated with multiple income sources, each of which may have specific requirements with respect to continuance, whether defined or undefined. For this reason, this grouping of income types may or may not have documentable continuance.
Example:
If the source of retirement income is Social Security retirement benefits, no additional documentation of continuance is required
If the source is a retirement annuity from an insurance company, there will generally be a defined term in which case continuance must be documented
1
Retirement income
(e.g., social security, defined benefit pension, annuity, other similar benefits)
Sellers must be knowledgeable about the source of the specific income type in order to determine whether or not documentable continuance is applicable. This includes, but is not limited to, knowledge of factors with respect to whether the payments are received pursuant to a written agreement, government program, law and/or regulation, as well as the applicable eligibility criteria governing the continued receipt of the income.
Section 5305.1
for requirements for these income types.
For long-term disability and SSI income types:
Pending or current re-evaluation of medical eligibility for insurance and/or benefit payments is not considered an indication that the insurance and/or benefit payment will not continue.
Survivor and dependent benefits
(e.g., Social Security Survivor Benefits, Survivors’ VA benefits, other similar benefits)
Long-term disability income
(e.g., Social Security disability benefits, VA disability compensation, worker’s compensation, private disability insurance)
Social Security Supplemental Security Income (SSI)
Public assistance income
(e.g., Temporary Assistance for Needy Families)
1
Highlights of the requirements from the individual income types are provided for illustrative purposes only. Refer to the sections shown above for complete requirements.
(e)
Alimony payments
The amount of the monthly alimony payment must be deducted from the stable monthly income if both of the following apply:
The Borrower is obligated to pay alimony
There are more than 10 months of payments remaining
Section 5401.2(b)(3)
for additional information.
