To ensure QM Status, PFIs are required to verify the Borrower’s current or reasonably expected income, pursuant to TILA/Regulation Z (including 12 CFR 1026.43). The verification requirements outlined in this section and this Guide are intended to meet TILA/Regulation Z and its official commentary which permits Originators to rely on GSE validation standards to provide reasonably reliable evidence (specifically Fannie Mae Single Family Selling Guide Sections B3-3). Any deviations in this Guide from the GSE’s verification standards were only intended to impose more restrictive requirements, and not intend to be more permissive. In some circumstances more restrictive, which are provided within this section. To the extent the guidance for verification requirements in this MPF Traditional Selling Guide contradict what is provided in aforementioned sections of Fannie Mae’s Single Family Selling Guide, the more restrictive policy will supersede. The Fannie Mae Selling Guides should only be used for verification purposes. Nothing in the Fannie Mae guides supersede a PFI’s obligation to considering Borrower’s current or reasonably expected income as provided for in TILA/Regulation Z (including 12 CFR 1026.43), and this is the stated intent for verification standards only, as a result, the underwriting and eligibility guidelines of the MPF Guides apply to MPF Traditional mortgage loans. While this is the stated intent for verification standards, only the underwriting and eligibility guidelines in the MPF Guides apply to MPF Traditional mortgage loans.
5.3.15.3.1 General Income Information
5.3.1.15.3.1.1 Stable and Predictable Income
The MPF Program underwriting guidelines emphasize the continuity of a Borrower’s stable income. The stable and reliable flow of income is a key consideration in mortgage loan underwriting. Individuals who change jobs frequently, but who are nevertheless able to earn consistent and predictable income, are also considered to have a reliable flow of income for qualifying purposes.
To demonstrate the likelihood that a consistent level of income will continue to be received for Borrowers with less predictable sources of income, the PFI must obtain information about prior earnings. Examples of less predictable income sources include commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradesmen. Considerations in determining stable monthly income are the type of income received, the length of time received and whether the income is likely to continue. In addition, for salaried Borrowers, considerations in determining stable monthly income are the length of time employed in the current position and in a current profession. Borrowers who change jobs frequently within the same line of work but who advance in income and benefits are considered to have stable income.
5.3.1.25.3.1.2 Variable Income
All income that is calculated by an averaging method must be reviewed to assess the Borrower’s history of receipt, the frequency of payment, and the trending of the amount of income being received. Examples of income of this type include income from hourly workers with fluctuating hours, or income that includes commissions, bonuses, or overtime.
History of Receipt: Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may be considered as acceptable income, as long as the Borrower’s loan application demonstrates that there are positive factors that reasonably offset the shorter income history.
Frequency of Payment: The PFI must determine the frequency of the payment (weekly, biweekly, monthly, quarterly, or annually) to arrive at an accurate calculation of the monthly income to be used in the trending analysis (see below). Examples:
If a Borrower is paid an annual bonus on March 31st of each year, the amount of the March bonus should be divided by 12 to obtain an accurate calculation of the current monthly bonus amount. Note that dividing the bonus received on March 31st by three months produces a much higher, inaccurate monthly average. If a Borrower is paid overtime on a biweekly basis, the most recent paystub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income. For example, Borrowers may have overtime income that is cyclical (transportation employees who operate snow plows in winter, package delivery service workers who work longer hours through the holidays). PFIs must investigate the difference between current period overtime and year-to-date earnings and document the analysis before using the income amount in the trending analysis.
Income Trending: After the monthly year-to-date income amount is calculated, it must be compared to prior years’ earnings using the Borrower’s W-2’s or signed federal income tax returns (or a standard Verification of Employment completed by the employer or third-party employment verification vendor).
- If the trend in the amount of income is stable or increasing, the income amount should be averaged.
- If the trend was declining but has since stabilized and there is no reason to believe that the Borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used.
- If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the declination occurred.
5.3.1.35.3.1.3 Continuity of Income (7/2/24)
Unless the PFI has knowledge to the contrary, if the income does not have a defined expiration date and the applicable history of receipt of the income is documented (per the specific income type), the PFI may conclude that the income is stable, predictable, and likely to continue. The PFI is not expected to request additional documentation from the Borrower.
If the income source does have a defined expiration date or is dependent on the depletion of an asset account or other limited benefit, the PFI must document the likelihood of continued receipt of the income for at least three years.
If the PFI is notified that the Borrower is transitioning to a lower pay structure, for example due to pending retirement or a new job, the PFI must use the lower amount to qualify the Borrower.
The following table contains examples of income types with and without defined expiration dates. This information is provided to assist PFIs in determining whether additional income documentation may be necessary to support a three-year continuance. Note that PFIs remain responsible for making the final determination of whether the Borrower’s specific income source has a defined expiration date.
| Expiration Date Not Defined | Defined Expiration Date* |
|---|
PFI does not need to document 3–year continuance
- automobile allowance
- base salary
- bonus, overtime, commission, or tip income
- capital gains income
- corporate retirement or pension
- disability income — long-term
- foster-care income
- interest and dividend income (unless other evidence that asset will be depleted)
- military income
- mortgage credit certificates
- part-time job, second job, or seasonal income
- rental income
- self-employment income
- Social Security, VA, or other government retirement or annuity
- Time-based restricted stock units or restricted stock income when awarded in multiple consecutive years
| PFI must document 3–year continuance - alimony, child support, or separate maintenance
- distributions from a retirement account – for example, 401(k), IRA, SEP, Keogh
- mortgage differential payments
- notes receivable
- public assistance (not including Section 8 Housing Choice Voucher Homeownership payments)
- royalty payment income
- Social Security (not including retirement or long-term disability)
- Time-based restricted stock units or restricted stock income when receipt was a one-time event
- VA benefits (not including retirement or long-term disability)
Note: Because these income sources have a defined expiration date or allow the depletion of an asset, care must be taken when this is the sole source or the majority of qualifying income. PFIs must consider the borrower’s continued capacity to repay the mortgage loan when the income source expires, or the distributions will deplete the asset prior to maturation of the loan.
|
Trust Income: Note that continuity of income for trust income must be based on the type of income received through the trust. For example, if the income from the trust is derived from rental income, then three-year continuance is not required. However, if the income is a fixed payment derived from a depleting asset, then three-year continuance must be determined.
5.3.1.45.3.1.4 Determining the Need for Federal Income Tax Returns
The PFI must obtain copies of the Borrower’s signed federal income tax returns filed with the IRS for the past one or two years (depending on the income type) for the following sources of income or employment.
Tax returns are required if the Borrower:
- is employed by family members (two years’ returns);
- is employed by interested parties to the property sale or purchase (two years’ returns);
- receives rental income from an investment property;
- receives income from temporary or periodic employment (or unemployment) or employment that is subject to time limits, such as a contract employee or a tradesman;
- receives income from capital gains, royalties, or other miscellaneous non-employment earnings reported on IRS Form 1099;
- receives income that cannot otherwise be verified by an independent and knowledgeable source (two years’ returns);
- uses foreign income to qualify;
- uses interest and dividend income to qualify;
- uses tip income reported on IRS Form 4137 that was not reported by the employer on the W-2 to qualify; or
- receives income from sole proprietorships, limited liability companies, partnerships, or corporations, or any other type of business structure in which the Borrower has a 25% or greater ownership interest. Borrowers with a 25% or greater ownership interest are considered self-employed. The PFI must document and underwrite the loan application using the requirements for self-employed Borrowers, as described in this Guide.
5.3.1.55.3.1.5 Verification of Income for Non-U.S. Citizen Borrowers
The following table describes income verification requirements for Borrowers who are non-U.S. citizens:
| Employment Type | Employment and Income Verification Requirements |
|---|
| Salaried or commissioned Borrower employed by a U.S. company or individual | Same as for a U.S. citizen, as provided for in this Guide. |
| Self-employed | Same as for a U.S. citizen, as provided for in this Guide. |
| Employed by a foreign corporation or a foreign government and paid in foreign currency (“foreign income”) | The PFI must obtain: - copies of the Borrower's signed federal income tax returns filed with the IRS for the most recent two-year period, and
- documentation to satisfy the standard documentation requirements in this Chapter.
Note: All income must be translated to U.S. dollars.
|
5.3.1.65.3.1.6 Using Nontaxable Income to Adjust the Borrower’s Gross Income (7/2/24)
The PFI should give special consideration to regular sources of income that may be nontaxable, such as child support payments, Social Security benefits, workers’ compensation benefits, certain types of public assistance payments, and food stamps.
The PFI must verify that the particular source of income is nontaxable unless the source of income meets one of the exceptions below. Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the nontaxable status of the income.
If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the PFI should develop an “adjusted gross income” for the Borrower by adding an amount equivalent to 25% of the nontaxable income to the Borrower’s income.
If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the Borrower’s nontaxable income, the PFI may use that amount to develop the adjusted gross income, which should be used in calculating the Borrower’s qualifying ratio.
PFIs are not required to provide documentation to support that the income is nontaxable for the following:
- Child support income: PFIs may treat the full amount of qualifying child support income as nontaxable and gross-up the income as described above.
- Social Security income: PFI may treat 15% of the income as nontaxable and gross-up the income as described above.
- Section 8 Housing Choice Voucher Homeownership Program payments: The full amount of income from these payments is nontaxable.
Example:
Benefit amount: $1,500
Nontaxable amount: $1,500 x 15% = $225
Gross-up amount: $225 x 25% = $56 (rounded to the nearest dollar)
Qualifying income: $1,556 (does not require additional documentation)
Note: If PFIs opt to gross-up more than 15% of Social Security income, documentation to support that the additional income is nontaxable must be included in the loan file.
5.3.1.75.3.1.7 Unacceptable Types of Income (2/14/25)
In addition to any income that may be deemed ineligible pursuant to other sections of this Guide, the following are unacceptable sources of income and may not be used to qualify for the loan:
- Income based on trailing spouse income;
- Draw income;
- VA education benefits;
- Income derived from illegal activity;
- Taxable income not listed on tax returns;
- Any income that cannot be documented and/or verified;
- Income that is not stable; and
- Income paid or earned in the form of Virtual Currency and/or Cryptocurrency.
5.3.25.3.2 Standards for Employment Documentation
PFIs must verify employment income for all Borrowers whose income is used to qualify for the mortgage loan. This verification can be provided by the Borrower, by the Borrower’s employer, or by a third-party employment verification vendor.
5.3.2.15.3.2.1 Employment Documentation Provided by the Borrower
The following table provides requirements for documentation provided by the Borrower.
| ✓ | Requirements — Paystubs and W–2s |
|---|
| | The paystub must be dated no earlier than 30 days prior to the initial loan application date and it must include all year-to-date earnings. Additionally, the paystub must include sufficient information to appropriately calculate income; otherwise, additional documentation must be obtained. Paystubs must comply with the allowable age of documentation requirements of this Guide. See 5.1.3 Age of Documents. |
| | IRS W-2 forms must cover the most recent one- or two-year period, based on the documentation requirements for the particular income type. The W-2 forms must clearly identify the Borrower as the employee. ”Most recent” W-2 is defined as the W-2 for the calendar year prior to the current calendar year. Alternative documentation, such as an IRS Wage and Income (W-2) Transcript, a written Request for Verification of Employment (PFIs may use Fannie Mae’s Form 1005 or Form 1005(S)) (see below) or the final year-to-date paystub, may be used as long as adequate information is provided. |
| | Documents must be computer-generated or typed by the Borrower’s employer(s), although paystubs that the Borrower downloads from the Internet are also acceptable. Documents must clearly identify the employer’s name and source of information. |
| | The documents must clearly identify the Borrower as the employee. |
| | The information must be complete and legible. |
| | The original source of the information must be a third party, such as the Borrower's human resources department, personnel office, payroll department, company's payroll vendor, or supervisor. |
| ✔ | Requirements — Tax Returns |
|---|
| | When required, personal federal income tax returns must be copies of the original returns that were filed with the IRS. All supporting schedules must be included. Alternatively, the PFI may obtain applicable transcripts of federal income tax returns.
“Most recent” tax return is defined as the last return scheduled to have been filed with the IRS. |
| | The information must be complete and legible. |
| | Each tax return must be signed by the Borrower unless the PFI has obtained one of the following signature alternatives: - documentation confirming that the tax returns were filed electronically,
- a completed IRS Form 4506–C (signed by the Borrower) for the year in question, or
- IRS transcripts that validate the tax return.
|
5.3.2.25.3.2.2 Employment Documentation provided by the Borrower’s Employer
PFIs may use Fannie Mae’s Request for Verification of Employment (Form 1005 or Form 1005(S)) or its equivalent that at minimum contains the same information as the Form 1005 or 1005 (S) to document income for a salaried or commissioned Borrower. The date of the completed form must comply with Section 5.1.3 Age of Documents and 5.1.4 Allowable Age of Federal Income Tax Returns requirements of this Guide.
The information on the Form 1005 or Form 1005(S) or equivalent must be legible.
The following fields on the form are optional:
| Field # | Title of Optional Field |
|---|
| 11 | Probability of continued employment |
| 14 | If overtime or bonus is applicable, is its continuance likely? |
| 16 | Date of applicant’s next pay increase |
| 17 | Projected amount of next pay increase |
| 18 | Date of applicant’s last pay increase |
| 19 | Amount of last pay increase |
| 24 | Reason for leaving (Part III — Verification of Previous Employment) |
The remaining fields on the form must be completed as applicable to the Borrower. For example, overtime may not be completed if the Borrower is in a position that does not pay overtime.
When the Borrower authorizes the PFI to obtain verifications of employment and income directly from the employer, the PFI must have the Borrower sign Form 1005 or Form 1005(S) or its equivalent.
5.3.2.35.3.2.3 Employment Documentation Provided by a Third-Party Employment Verification Vendor
The PFI may receive employment and income verification directly from a third-party employment verification vendor. These verifications are acceptable as long as:
- the Borrower provided proper authorization for the PFI to use this verification method,
- the date of the completed verification is in compliance with Age of Document requirements of this Guide,
- the PFI has determined that the vendor has made provisions to comply with reasonable quality control requests from both the PFI and any subsequent mortgagee, and
- the PFI understands it will be held accountable for the integrity of the information obtained from this source.
If necessary, the PFI must supplement these verifications by obtaining any missing information from the Borrower or his or her employer.
5.3.35.3.3 Base Pay (Salary or Hourly), Bonus and Overtime Income
The following table provides verification requirements for base pay, bonus, and overtime income:
| ✓ | Verification of Base Pay, Bonus, and Overtime Income |
|---|
| | A minimum history of two years of employment income is recommended. However, income that has been received for a shorter period of time may be considered as acceptable income, as long as the Borrower’s employment profile demonstrates that there are positive factors to reasonably offset the shorter income history.
Borrowers relying on overtime or bonus income for qualifying purposes must have a history of no less than 12 months to be considered stable. |
| | Base Pay (Salary and Hourly):
Obtain the following documents: - a completed Request for written Verification of Employment or
- the Borrower’s recent paystub and IRS W-2 forms covering the most recent two-year period.
|
| | Bonus or Overtime:
Obtain the following documents: - a completed written Verification of Employment, or
- the Borrower’s recent paystub and IRS W-2 forms covering the most recent two-year period.
|
| | See 5.3.1.2 Variable Income, for additional information on calculating variable income (applies to hourly paid employees with fluctuating hours and bonus and overtime). |
| | If the Borrower has recently changed positions with his or her employer, determine the effect of the change on the Borrower’s eligibility and opportunity to receive bonus or overtime pay in the future. |
| | If a Borrower who has historically been employed on a part-time basis indicates that he or she will now be working full-time, obtain written confirmation from the Borrower’s employer. |
| | A verbal VOE is required from each employer. See 5.3.7 Verbal Verification of Employment, for specific requirements. |
| | See 5.3.2 Standards for Employment Documentation, for additional information about verifying employment income. |
5.3.3.15.3.3.1 Base Income Calculation Guidelines
After the applicable income documentation has been obtained, the PFI must calculate the Borrower’s eligible qualifying base income. The following table provides guidance for standard employment documentation:
| How Often Paid | How to Determine Monthly Income |
|---|
| Annually | Annual gross pay / 12 months |
| Monthly | Use monthly gross payment amount |
| Twice Monthly | Twice monthly gross pay x 2 pay periods |
| Biweekly | (Biweekly gross pay x 26 pay periods) / 12 months |
| Weekly | (Weekly gross pay x 52 pay periods) / 12 months |
| Hourly | (Hourly gross pay x average # of hours worked per week x 52 weeks) / 12 months |
| All of the above calculations must be compared with the documented year-to-date base earnings (and past year earnings, if applicable) to determine if the income amount appears to be consistent. |
5.3.3.25.3.3.2 Military Income
Military personnel may be entitled to different types of pay in addition to their base pay. Flight or hazard pay, rations, clothing allowance, quarters’ allowance, and proficiency pay are acceptable sources of stable income, as long as the PFI can establish that the particular source of income will continue to be received in the future. To verify military base pay and entitlements, the PFI must obtain the Borrower's most recent Leave and Earnings Statement (LES).
Income paid to military reservists while they are satisfying their reserve obligations also is acceptable if it satisfies the same stability and continuity tests applied to secondary employment.
5.3.45.3.4 Commission Income
The following requirements apply for verifying commission income:
- A minimum history of 2 years of commission income is recommended; however, commission income that has been received for 12 to 24 months may be considered as acceptable income, as long as there are positive factors to reasonably offset the shorter income history.
- One of the following must be obtained to document commission income:
- a completed Request for Verification of Employment (Form 1005 or Form 1005(S)) or its equivalent, or
- the Borrower’s recent paystub and IRS W-2 forms covering the most recent two-year period.
- A verbal VOE is required from each employer. See 5.3.7 Verbal Verification of Employment, for specific requirements.
See 5.3.1 General Income Information, for additional information about calculating variable income.
See 5.3.2 Standards for Employment Documentation, for additional information about verifying employment income.
5.3.55.3.5 Secondary Employment Income (Second Job and Multiple Jobs) and Seasonal Income
5.3.5.15.3.5.1 Documentation Requirements
The income sources discussed in this topic must be documented by obtaining the following:
- a completed Request for Verification of Employment (Form 1005 or Form 1005(S)) or its equivalent; or
- the Borrower’s recent paystub and IRS W-2 forms covering the most recent two-year period. (Signed federal income tax returns may also be required to verify unemployment income related to seasonal employment.)
A verbal VOE is also required from each employer. See 5.3.7 Verbal Verification of Employment, for specific requirements.
As these income types may be hourly or seasonal, refer to 5.3.1 General Income Information, for additional information on calculating variable income. Also refer to 5.3.2 Standards for Employment Documentation, for additional information about verifying employment income.
5.3.5.25.3.5.2 Verification of Secondary Employment Income
Secondary employment income is income that is derived from a second job or multiple jobs the Borrower may have. The PFI must verify the following.
| ✓ | Verification of Secondary Employment Income |
|---|
| | Verification of a minimum history of two years secondary employment income is recommended. However, income that has been received for a shorter period of time (but, no less than 12 months) may be considered as acceptable income, as long as there are positive factors to reasonably offset the shorter income history. |
| | A Borrower may have a history that includes different employers, which is acceptable as long as income has been consistently received. In no instance may the Borrower have any gap in employment greater than one month in the most recent 12-month period unless the secondary employment is considered seasonal income (subject to the requirements below). |
5.3.5.35.3.5.3 Verification of Seasonal Income
The PFI must verify the following for seasonal income:
- Verify the Borrower has at least a two-year history of seasonal employment and income.
- For seasonal unemployment compensation, verify that it is appropriately documented, clearly associated with seasonal layoffs, expected to recur, and reported on the Borrower’s signed federal income tax returns. See 5.3.9 Other Sources of Income, for more information on unemployment benefits.
5.3.65.3.6 4506-C and Tax Transcripts (8/27/24)
If tax transcripts are not obtained during the origination process, the PFI is required to obtain the tax transcripts from the IRS (or designee) using the Form 4506-C or an acceptable alternative IRS form signed at Closing for all Mortgage Loans the MPF Program selects for a post-Closing QC review (including targeted reviews as applicable), regardless of the type of income documentation provided in the Mortgage Loan File. In lieu of the 4506-C, an alternative form (for example, IRS Form 8821) or process is also acceptable if it authorizes the release of comparable tax information from the IRS.
If tax returns were used in the underwriting of the Mortgage Loan, the PFI must obtain transcripts for the same tax years as documented by the tax returns. For self-employed Borrowers whose income documentation includes both individual and business tax returns, the PFI must obtain transcripts for both the individual and the business returns. The PFI must reconcile the transcript information received from the IRS with the income documents in the Mortgage Loan File. PFIs are required to provide express consent from the taxpayers as permitted by applicable law, this includes the Taxpayer First Act.
Failure to obtain the tax transcripts will be cited as a QC exception, the severity of which will be determined by the MPF Bank and/or Investor.
When the Originator requests tax transcripts prior to Closing, the transcripts must be returned/mailed directly to the Originator’s underwriting or processing staff.
Transcripts must match the tax returns exactly.
The following table shows the minimum transcript information to request from the IRS under four typical income documentation scenarios:
| | The 4506-C Request must be for the most recent filing(s) of: |
| If the level of income documentation used for underwriting the loan and reported on the Loan Presentment is: | 1040 | 1120 or
1065 | 1099 | W-2 |
| YTD Paystub & Two W-2s | | | | 2 years |
| YTD Income Information & Two 1099s/1040s | 2 years | | 2 years | |
| Two Years Personal Returns | 2 years | | | |
| Two Years Personal Returns & Two Years Business Returns | 2 Years | 2 Years | | |
If a second home Borrower owns five (5) to ten (10) financed properties, and the rental income is reflected on the Borrower’s tax returns, tax transcripts must be obtained to validate the accuracy of the tax returns prior to closing. If the five (5) to ten (10) financed properties were acquired since the Borrower’s last tax return was filed (and therefore not reported as rental income), tax transcripts are not required.
When tax transcripts are obtained prior to Closing, the level of income documentation selected for Loan Presentment should be: Documentation Type 20 = “24 months or more income/employment verification & tax transcripts acquired using IRS Form 4506-C” (See OG3 Instructions for additional information to complete a Loan Presentment). In order to use this Documentation Type Code, the transcripts must validate the income documentation used to calculate the Borrower’s income.
The IRS tax return transcripts are not to be used to calculate the Borrower’s income. They are only to be used to validate the income documentation provided by the Borrower that was used as income verification during the underwriting process.
5.3.75.3.7 Verbal Verification of Employment (5/27/25)
PFIs must obtain a verbal verification of employment (verbal VOE) for each Borrower using employment or self-employment income to qualify. The verbal VOE must be obtained within 10 business days prior to the Note date for employment income, and within 120 calendar days prior to the Note date for self-employment income. The verbal VOE requirement is intended to help PFIs mitigate risk by confirming, as late in the process as possible, that the Borrower remains employed as originally disclosed on the loan application. A change in the Borrower’s employment status could have a significant impact on that Borrower’s capacity to repay the mortgage loan and must be fully reevaluated.
Alternatively, PFIs may obtain the verbal VOE after closing, confirming that the Borrower remains employed as originally disclosed on the loan application, up to the time of loan delivery. If the verbal VOE (or allowable alternative) cannot be obtained prior to delivery, the loan is ineligible for delivery.
Note: If the employer confirms the Borrower is currently on temporary leave, the PFI must consider the Borrower “employed.” See 5.3.9 Other Sources of Income, for details on temporary leave.
The following table describes the requirements for a verbal VOE and allowable alternatives:
| Type of Income | Verbal VOE Requirements |
|---|
| Hourly, Salary, and Commission Income (Non-Military) | PFIs must use the Exhibit R: Verbal Verification of Employment or an equivalent to document the verbal verification provided it includes all of the following requirements: - The PFI must independently obtain a phone number and, if possible, an address for the Borrower's employer. This can be accomplished by using a telephone book, the Internet, directory assistance, or by contacting the applicable licensing bureau.
- The PFI must contact the employer verbally and confirm the Borrower's current employment status within 10 business days prior to the Note date.
Note: If the employer confirms the Borrower is currently on temporary leave, the PFI must consider the Borrower “employed.” See 5.3.9 Other Sources of Income, for details on temporary leave. - The conversation must be documented. It should include the following:
- name and title of the person who confirmed the employment for the PFI,
- name and title of the person who completed the verification for the employer,
- applicant’s dates of employment,
- applicant’s current employment status,
- how applicant is related to the owner of business, if applicable,
- applicant’s percentage of ownership in business, if applicable,
- date of the call, and
- the source of the phone number.
Alternative Methods to Verify Employment: - a written verification confirming the Borrower’s current employment status within 10 business days prior to the Note date. The written documentation must include the name and title of the person who completed the verification for the employer.
- PFIs can obtain an email exchange with the Borrower's employer from the employer's work email address within 10 business days prior to the Note date.
- The PFI must conduct additional due diligence to confirm that the email address for the employer is accurate. Examples of due diligence include, but are not limited to, searches of domain name on employer website (review for match to employer email address), employer directory on the internet, or other professional networking or business profile websites.
- The email exchange must include Borrower's name and employer's name; name, title, and work email address of the individual contacted at the employer; date of contact; and Borrower's current employment status.
- Within 15 business days prior to the Note date, the borrower can provide either
- the most recent available paystub as of that date that, meets the requirements in 5.3.2 Standards for Employment Documentation; reflects information for the most recent expected pay period based on the date it is provided and the borrower's pay cadence; and does not include any information indicating the borrower may not be actively employed.
- Bank statements dated no earlier than 15 business days prior to the note date that
- meet the requirements in 5.8.1 Verification of Deposits and Assets
- reflects information for the most recent expected pay period based on the date of the statement and the borrower's pay cadence, and
- does not include any information indicating the borrower may not be actively employed.
- If the Borrower is 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), and the union facilitates the Borrower’s placement in each assignment, the PFI may obtain the verbal VOE from the union.
- If the employer uses a third-party employment verification vendor, the PFI must obtain written verification from the vendor of the Borrower’s current employment status within the same time frame as the verbal VOE requirements.
Note: Because third-party vendor databases are typically updated monthly, the verification must evidence that the information in the vendor's database was no more than 35 days old as of the Note date. |
| Military Personnel | If the Borrower is in the military, in lieu of a verbal or written VOE, the PFI must obtain either
- a military Leave and Earnings Statement dated within 120 calendar days prior to the note date, or
- a verification of employment through the Defense Manpower Data Center.
|
| Self-Employed Income | Requirements:
- The PFI must verify the existence of the Borrower's business within 120 calendar days prior to the note date
- from a third party, such as a CPA, regulatory agency, or the applicable licensing bureau, if possible; or
- by verifying a phone listing and address for the Borrower's business using a telephone book, the internet, or directory assistance.
- The PFI must document the source of the information obtained and the name and title of the PFIs employee who obtained the information.
|
5.3.85.3.8 Rental Income
In conjunction with the policies in this topic, PFIs must also comply with, as applicable, but not limited to, the policies in the following:
- 5.3.1.3 Continuity of Income;
- 5.7.1 Minimum Reserve Requirements;
- 5.14.5 Qualifying Impact of Other Real Estate Owned.
5.3.8.15.3.8.1 Eligible Properties
Rental income is an acceptable source of stable income if it can be established that the income is likely to continue. If the rental income is derived from the subject property, the property must be a two- to four-unit principal residence property in which the Borrower occupies one of the units.
If the income is derived from a property that is not the subject property, there are no restrictions on the property type. For example, rental income from a commercial property owned by the Borrower is acceptable if the income otherwise meets all other requirements.
5.3.8.25.3.8.2 Ineligible Properties
Generally, rental income from the Borrower’s principal residence (a one-unit principal residence or the unit the Borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the Borrower. However, there are certain exceptions to this policy for boarder income.
5.3.8.35.3.8.3 General Requirements for Documenting Rental Income (3/21/24)
If a Borrower has a history of renting the subject or another property, generally the rental income will be reported on IRS Form 1040, Schedule E of the Borrower’s personal tax returns or on Rental Real Estate Income and Expenses of a Partnership or an S Corporation form (IRS Form 8825) of a business tax return. If the Borrower does not have a history of renting the subject property or if, in certain cases, the tax returns do not accurately reflect the ongoing income and expenses of the property, the PFI may be justified in using a fully executed current lease agreement. Examples of scenarios that justify the use of a lease agreement are
- purchase transactions;
- refinance transactions in which the Borrower purchased the rental property during or subsequent to the last tax return filing;
- refinance transactions of a property that experienced significant rental interruptions such that income is not reported on the recent tax return (for example, major renovation to a property occurred in the prior year that affected rental income); and
- transactions where rental income is being used to qualify for any property placed in service in the current calendar year, for example, when converting a principal residence to an investment property.
When the subject property is a two- to four-unit property that will generate rental income used for qualifying purposes, PFIs must use Small Residential Income Property Appraisal Report (Form 1025/Freddie Mac Form 72) or an equivalent form containing at minimum the same information required in the GSE form.
Note: The rental payment on the lease must be reflected in U.S. dollars (cannot be in virtual currency).
5.3.8.45.3.8.4 Documenting Rental Income from a 2–4-unit Primary Residence Subject Property
PFI must obtain documentation that is used to calculate the monthly rental income generated from a subject property that is a 2–4-unit primary residence, used for qualifying purposes. The documentation may vary depending on whether the Borrower has a history of renting the property, and whether the prior year tax return includes the income.
| Does the Borrower Have a History of Receiving Rental Income from the Subject Property? | Transaction Type | Documentation Requirements |
|---|
| Yes | Refinance | Fannie Mae Form 1025/Freddie Mac Form 72, as applicable, and either - the Borrower’s most recent year of signed federal income tax returns, including Schedule 1 and Schedule E, or
- copies of the current lease agreement(s) if the Borrower can document a qualifying exception (see Reconciling Partial or No Rental History on Tax Returns below).
|
| No | Purchase | Fannie Mae Form 1025/Freddie Mac Form 72, as applicable, and copies of the current lease agreement(s) if transferred to the Borrower. If the property is not currently rented or if the existing lease agreement is not being transferred to the borrower then, lease agreements are not required and Fannie Mae Form 1025/Freddie Mac Form 72 may be used. If there is a lease on the property that is being transferred to the Borrower, see Section 9.6 Acceptable Title Exceptions for additional information. |
| No | Refinance | Fannie Mae Form 1025/Freddie Mac Form 72, as applicable, and
- copies of the current lease agreement(s).
|
If the Borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for PFI reporting purposes.
5.3.8.55.3.8.5 Documenting Rental Income from Property Other than the Subject Property (3/21/24)
When the Borrower owns property – other than the subject property – that is rented, the PFI must document the monthly gross (and net) rental income with the Borrower’s most recent signed federal income tax return that includes Schedule 1 and Schedule E. Copies of the current lease agreement(s) may be substituted if the Borrower can document a qualifying exception. See 5.3.8.6 Reconciling Partial or No Rental History on Tax Returns below and Calculating Monthly Qualifying Rental Income (or Loss).
5.3.8.65.3.8.6 Reconciling Partial or No Rental History on Tax Returns
In order for the PFI to determine qualifying rental income, the PFI must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. In some situations, the PFIs analysis may determine that using alternative rental income calculations or using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties. This policy may be applied to refinances of a subject rental property or to other rental properties owned by the Borrower.
If the Borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the PFI may determine qualifying rental income by using:
- Schedule E income and expenses, and annualizing the income (or loss) calculation; or
- fully executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation.
| If ... | Then ... |
|---|
| the property was acquired or placed into service during the most recent tax filing year, | - the PFI must confirm the purchase date using the settlement statement or other documentation, and
- Fair Rental Days on Schedule E of the most recently filed tax return must confirm partial year rental income.
|
| the property was acquired during or placed into service subsequent to the most recent tax filing year, | - the PFI must confirm the purchase date using the settlement statement or other documentation, if applicable and
- Schedule E (Fair Rental Days) or the most recently filed tax return must confirm no reflect rental income or expenses for this property.
|
| the rental property was out of service for an extended period, | - Repair expenses on Schedule E of the most recently filed tax return must reflect the costs for renovation or rehabilitation. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service.
- Schedule E (Fair Rental Days) of the most recently filed tax return must confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year.
|
| the PFI determines that some other situation warrants an | - the PFI must provide an explanation and justification in the loan file.
|
If the Borrower is converting a principal residence to an investment property, see 5.14.5 Qualifying Impact of Other Real Estate Owned, for guidance in using that rental income to qualify the Borrower.
5.3.8.75.3.8.7 Calculating Monthly Qualifying Rental Income or Loss (3/21/24)
To determine the amount of rental income from the subject property that can be used for qualifying purposes when the Borrower is purchasing or refinancing a two- to four-unit principal residence, the PFI must consider the following:
- The PFI must establish a history of property management experience by obtaining one of the following:
| If the Borrower... | And Rental Income is from the... | Then for qualifying purposes... |
|---|
- currently owns a principal residence (or has a current housing expense), and
- has at least a one-year history of receiving rental income or at least one year of documented property management experience
- does not currently have a housing expense, and
- has at least one-year of receiving rental income from the property
| subject property or non-subject property | - there are no restrictions on the amount of rental income that can be used.
|
- currently owns a principal residence (or has a current housing expense), and
- has less than one-year history of receiving rental income from the related property or documented property management experience
| subject property | - for a principal residence, rental income in an amount not exceeding PITIA of the subject property can be added to the borrower’s gross income.
|
| | non-subject property (new or newly placed in service less than a year) | - for a principal residence, rental income added to the borrower's gross monthly income is restricted to an amount not exceeding PITIA of the related property.
- for an investment property, rental income can only be used to offset the PITIA of the related property (in other words, is limited to zero positive cash flow).
|
- does not own a principal residence, and
- does not have a current housing expense
| subject property | rental income from the subject property cannot be used. |
| | non-subject property (new or newly placed in service less than a year) | rental income from the property cannot be used. |
- The Borrower’s most recent signed federal income tax return, including Schedules 1 and E. Schedule E should reflect rental income received for any property and Fair Rental Days of 365;
- If the property has been owned for at least one year, but there are less than 365 Fair Rental Days on Schedule E, a current signed lease agreement may be used to supplement the federal income tax return; or
- A current signed lease may be used to supplement a federal income tax return if the property was out of service for any time period in the prior year. Schedule E must support this by reflecting a reduced number of days in use and related repair costs.
Method for Calculating the Income
The method for calculating rental income (or loss) for qualifying purposes is dependent upon the documentation that is being used.
Federal Income Tax Returns, Schedule E. When Schedule E is used to calculate qualifying rental income, the PFI must add back any listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the Borrower’s cash flow. Non-recurring property expenses may be added back, if documented accordingly.
If the property was in service:
- for the entire tax year, the rental income must be averaged over 12 months; or
- for less than the full year, the rental income must be averaged over the number of months that the Borrower used the property as a rental unit.
See Treatment of the Income (or Loss) below for further instructions.
Lease Agreements, Form 1007 or Form 1025: When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the PFI must calculate the rental income by multiplying the gross monthly rent(s) by 75%. The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.
When using a lease agreement, the lease agreement amount must be supported by:
- Fannie Mae Form 1007 or Fannie Mae Form 1025, as applicable, or
- evidence the terms of the lease have gone into effect. Evidence may include:
- two months consecutive bank statements or electronic transfers of rental payments for existing lease agreements, or
- copies of the security deposit and first month's rent check with proof of deposit for newly executed agreements.
See Treatment of the Income (or Loss) below for further instructions.
5.3.8.85.3.8.8 Treatment of the Income (or Loss) (3/21/24)
The treatment and amount of monthly qualifying rental income (described in 5.3.8.7 Calculating Monthly Rental Income (or Loss)) in the calculation of the Borrower's total debt-to-income ratio — varies depending on whether the Borrower occupies the rental property as their principal residence.
If the rental income relates to the Borrower’s principal residence:
- The monthly qualifying rental income (as defined above) must be added to the Borrower’s total monthly income. (The income is not netted against the PITIA of the property.)
- The full amount of the mortgage payment (PITIA) must be included in the Borrower’s total monthly obligations when calculating the debt-to-income ratio.
If the rental income (or loss) relates to a property other than the Borrower's principal residence:
- If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the Borrower’s total monthly income. (subject to the limits in 5.3.8.7 Calculating Monthly Rental Income (or Loss))
- If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the Borrower’s total monthly obligations.
- The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.
- The full monthly payment for the Borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation.
Note: When a borrower owns multiple rental properties, the rental income for all non-subject properties is first calculated for each property, then aggregated. The aggregate total of the income (or loss) is then added to the borrower's total monthly income or included in their monthly obligations, as applicable.
5.3.8.95.3.8.9 Offsetting Monthly Obligations for Rental Property Reported through a Partnership or an S Corporation
If the Borrower is personally obligated on the mortgage debt (as evidenced by inclusion of the related mortgage(s) on the credit report) and gross rents and related expenses are reported through a partnership or S corporation, the business tax returns may be used to offset the property’s PITIA. The steps described below should be followed:
- Obtain the Borrower’s business tax returns, including IRS Form 8825 for the most recent year.
- Evaluate each property listed on Form 8825, as shown below:
- From total gross rents, subtract total expenses. Then add back insurance, mortgage interest, taxes, homeowners’ association dues (if applicable), depreciation, and non-recurring property expenses (if documented accordingly).
- Divide by the number of months the property was in service.
- Subtract the entire PITIA (proposed for subject property or actual for real estate owned) to determine the monthly property cash flow.
- If the resulting net cash flow is positive, the PFI may exclude the property PITIA from the Borrower’s monthly obligations when calculating the debt-to-income ratio.
- If the resulting net cash flow is negative (that is, the rental income derived from the investment property is not sufficient to fully offset the property PITIA), the calculated negative amount must be included in the Borrower’s monthly obligations when calculating the debt-to-income ratio.
In order to include a positive net rental income received through a partnership or an S corporation in the Borrower’s monthly qualifying income, the PFI must evaluate it according to the requirements for income received from a partnership or an S corporation. See 5.6.1 Analyzing Partnership Returns for a Partnership or LLC and 5.6.2 Analyzing Returns for an S Corporation.
5.3.8.105.3.8.10 Rental Income Calculation Worksheets
PFIs may use Fannie Mae’s worksheets to calculate rental income. Use of these worksheets is optional. The worksheets are:
- Rental Income Worksheet – Principal Residence, 2– to 4–unit Property (Form 1037),
- Rental Income Worksheet – Individual Rental Income from Investment Property(s) (up to 4 properties) (Form 1038),
- Rental Income Worksheet – Individual Rental Income from Investment Property(s) (up to 10 properties) (Form 1038A), and
- Rental Income Worksheet – Business Rental Income from Investment Property(s) (Form 1039).
5.3.8.115.3.8.11 Reporting of Gross Monthly Rent (3/21/24)
Eligible rents on the subject property (gross monthly rent) must be reported in the loan delivery data for all two- to four-unit principal residence properties, regardless of whether the Borrower is using rental income to qualify for the mortgage loan. If the Borrower is using rental income from the subject property to qualify for the mortgage loan, all of the applicable requirements above must be followed to document and calculate the income.
If the Borrower is not using any rental income from the subject property to qualify, gross monthly rent must be documented only for PFI reporting purposes. The Borrower can provide one of the sources listed above, or may provide one of the following sources (listed in order of preference):
- the appraisal report for a one-unit investment property or two- to four-unit property, or Single-Family Comparable Rent Schedule (Form 1007), provided neither the applicable appraisal nor Form 1007 is dated 12 months or more prior to the date of the Note;
- if the property is not currently rented, the PFI may use the opinion of market rents provided by the appraiser; or
- if an appraisal or Form 1007 is not required for the transaction, the PFI may rely upon either a signed lease from the Borrower or may obtain a statement from the Borrower of the gross monthly rent being charged (or to be charged) for the property. The monthly rental amounts must be stated separately for each unit in a two- to four-unit property. The disclosure from the Borrower must be in the form of one of the following:
- a written statement from the Borrower, or
- an addition to the Mortgage Loan Application (Form 1003).
The PFI must retain the documentation in the loan file that was relied upon to determine the amount of eligible rent reported.
5.3.95.3.9 Other Sources of Income
5.3.9.15.3.9.1 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 Age of Documents policy, unless specifically excluded below.
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 mortgage loan. For income types that require sufficient remaining assets to establish continuance, those assets cannot be in the form of virtual currency.
5.3.9.25.3.9.2 Alimony, Child Support, or Separate Maintenance
The following table provides verification requirements for alimony, child support, or separate maintenance.
| ✓ | 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: - A copy of a divorce decree or separation agreement (if the divorce is not final) that indicates the monthly payment and states the amount of the award and the period of time over which it will be received. Note: If a Borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the PFI should not consider any proposed or voluntary payments as income.
- Any other type of written legal agreement or court decree describing the payment terms.
- Documentation that verifies any applicable state law that mandates alimony, child support, or separate maintenance payments, which must specify the conditions under which the payments must be made.
|
| | 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 PFI may include alimony, child support, or separate maintenance as income only if the Borrower discloses it on the loan application (Fannie Mae Form 1003/ Freddie Mac Form 65) and requests that it be considered in qualifying for the loan.
5.3.9.35.3.9.3 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 PFI 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.
5.3.9.45.3.9.4 Boarder Income
A boarder is a non-Borrower who currently lives in the Borrower's Primary Residence — not in a rental unit — in exchange for regular, timely rent payments. The MPF Program accepts Boarder income, PFIs may use Boarder income to qualify provided the income is expected to continue.
The following table provides verification requirements for income from boarders.
| ✓ | 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. |
5.3.9.55.3.9.5 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 and use the averaged amount as part of the Borrower’s qualifying income as long as the Borrower provides current evidence that he or she owns additional property or assets that can be sold if extra income is needed to make future mortgage loan payments.
Note: Capital losses identified on IRS Form 1040, Schedule D, do not have to be considered when calculating income or liabilities, even if the losses are recurring.
Due to the nature of this income, current receipt of the income is not required to comply with the Age of Documents policy. However, documentation of the asset ownership must be in compliance with the 5.1.3 Age of Documents. |
5.3.9.65.3.9.6 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 5.3.9.22 Social Security Income for more information.
| ✓ | 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: - the Borrower’s current eligibility for the disability benefits,
- the amount and frequency of the disability payments, and
- if there is a contractually established termination or modification date.
|
| | 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 5.3.9.23 Temporary Leave Income. |
5.3.9.75.3.9.7 Employment Offers or Contracts (1/18/24)
A Mortgage Loan may close prior to the Borrower beginning new employment and receiving income if the Borrower provided it meets the requirements in this section.
If the Borrower is scheduled to begin employment under the terms of an employment offer or contract, the PFI may deliver the loan in accordance with one of the options outlined below.
| ✓ | Option 1 -- Paystub Obtained Before Loan Delivery |
|---|
| | The PFI must obtain an executed copy of the Borrower's offer or contract for future employment and anticipated income.
Note: The Borrower cannot be employed by a family member or by an interested party to the transaction. |
| | Prior to delivering the mortgage loan, the PFI 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. |
| ✓ | Option 2 -- Paystub Not Obtained Before Loan Delivery |
|---|
| | This option is limited to loans that meet the following criteria: - purchase transaction,
- principal residence,
- one-unit property,
- the Borrower is not employed by a family member or by an interested party to the transaction, and
- the Borrower is qualified using only fixed base income.
|
| | The PFI must obtain and review the Borrower’s offer or contract for future employment. The employment offer or contract must: - clearly identify the employer and the Borrower, be signed by the employer, and be accepted and signed by the Borrower;
- clearly identify the terms of employment, including position, type and rate of pay, and start date; and
- be non-contingent.
Note: If conditions of employment exist, the PFI must confirm prior to closing that all conditions of employment are satisfied either by verbal verification or written documentation. This confirmation must be noted in the mortgage loan file. 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 PFI 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 | - Employment offer or contract; and
- Verbal verification of employment that confirms active employment status
| | No more than 90 days after the Note date | Employment offer or contract | | | The PFI must document, in addition to the amount of reserves required for the transaction, one of the following: - Financial reserves sufficient to cover principal, interest, taxes, insurance, and association dues (PITIA) for the subject property for six months; or
- Financial resources sufficient to cover the monthly liabilities included in the debt-to-income ratio, including the PITIA for the subject property, for the number of months between the note date and the employment start date, plus one. For calculation purposes, consider any portion of a month as a full month.
Financial resources may include: - financial reserves, and
- current income.
Current income refers to net income that is currently being received by the Borrower (or co-Borrower), may or may not be used for qualifying, and may or may not continue after the Borrower starts employment under the offer or contract. For this purpose, the PFI may use the amount of income the Borrower is expected to receive between the note date and the employment start date. If the current income is not being used or is not eligible to be used for qualifying purposes, it can be documented by the PFI using income documentation, such as a paystub, but a verification of employment is not required. |
|
5.3.9.85.3.9.8 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 the Age of Documents policy. |
| | Assets must be liquid and available to the Borrower and must be sourced as one of the following: - A non-self-employed severance package or non-self-employed lump sum retirement package (a lump sum distribution) — these funds must be documented with a distribution letter from the employer (Form 1099–R) and deposited to a verified asset account.
- For 401(k) or IRA, SEP, Keogh retirement accounts – the Borrower must have unrestricted access to the funds in the accounts and can only use the accounts if distribution is not already set up or the distribution amount is not enough to qualify. The account and its asset composition must be documented with the most recent monthly, quarterly, or annual statement.
|
| | 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 mortgage 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 | | Total eligible documented assets | (=) $450,000 | Minus funds required for closing
(down payment, closing costs, reserves) | (-) $100,000 | | Net Documented Assets | (=) $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:
| Loan Parameter | Requirement |
|---|
| Maximum LTV, CLTV, and HCLTV Ratio | 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 |
| Number of Units | As permitted by occupancy type |
| 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.”
5.3.9.95.3.9.9 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.
| ✓ | Verification of Foreign Income |
|---|
| | Copies of signed federal income tax returns for the most recent two years that include foreign income. |
| | The PFI must satisfy the standard documentation requirements based on the source and type of income as outlined in 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.
Note: All income must be translated to U.S. dollars. |
5.3.9.105.3.9.10 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.
| ✓ | 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: - the Borrower has at least a 12-month history of providing foster-care services, and
- the income does not represent more than 30% of the total gross income that is used to qualify for the mortgage loan.
|
5.3.9.115.3.9.11 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 5.3.3 Base Pay (Salary or Hourly), Bonus, and Overtime Income.
5.3.9.125.3.9.12 Interest and Dividends
The following table provides verification requirements for interest and dividends income.
| ✓ | 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 Age of Documents policy. |
| | Document a two-year history of the income, as verified by: - copies of the Borrower's signed federal income tax returns, or
- copies of account statements.
|
| | Develop an average of the income received for the most recent two years. Refer to the 5.3.1.2 Variable Income, 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. |
5.3.9.135.3.9.13 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 his or her 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 he or she is eligible for a 20% credit under the MCC program, the amount that should be added to his or her monthly income would be $125 ($100,000 x 7.5% x 20% = $1500 ÷ 12 = $125).
The PFI must obtain a copy of the MCC and the PFI documented calculation of the adjustment to the Borrower’s income and include them in the mortgage loan file.
For refinance transactions, the PFI 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 mortgage loan. Copies of the MCC documents, including the reissue certification, must be maintained in the new mortgage loan file.
Note: Because the MCC is transaction specific, it does not have to comply with the Age of Documents policy.
5.3.9.145.3.9.14 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 PFI rather than to the Borrower.
The following table provides verification requirements for mortgage differential payment income.
| ✓ | 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 Age of Documents. |
5.3.9.155.3.9.15 Non-Occupant Borrower Income
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, subject to the LTV requirements in 3.1.4 Non-Occupant Co-Borrower.
5.3.9.165.3.9.16 Notes Receivable Income
The following table provides verification requirements for Notes receivable income.
| ✓ | 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. |
5.3.9.175.3.9.17 Public Assistance Income (7/2/24)
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. |
The Housing Choice Voucher 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 PFI can develop an adjusted gross income for the Borrower in accordance to this Guide. |
5.3.9.185.3.9.18 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.
- The income from unemployment benefits can be used in the calculation of financial resources that are required under Option 2 in Employment Offers or Contracts above.
5.3.9.195.3.9.19 Restricted Stock Units and Restricted Stock Employment Income (5/9/24)
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.
| ✓ | 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 - future vesting equal to or greater than previous vesting and that will continue for at least 24 months; or
- restricted stock income received for the previous 5 years from any employer.
For time-based awards: A minimum history of 12 months restricted stock income from the current employer is required.
The PFI must confirm continuance of income pursuant to 5.3.1.3 Continuity of Income. |
|---|
|
| | PFIs must document all the following: - evidence stock is publicly traded;
- current vesting schedule reflecting past and future vesting;
- brokerage or bank statement showing receipt of previous year(s) distribution of restricted stock and, at a minimum, the number of vested shares or cash equivalent;
- a completed Verification of Employment that shows restricted stock distributions, or the borrowers recent paystub showing receipt of restricted stock income; and
- the borrower's IRS W-2 forms covering the most recent two-year period.
The calculation method for restricted stock income will vary depending on whether payment is made in shares or cash. For income paid in shares: - (200-Day Moving Average of share price x total number of distributed vested shares (pre-tax) in most recent 24 months) /24 months
For income paid in cash: - Total cash distributed (pre-tax) equal to the value of vested shares in the most recent 24 months /24 months
Note: When the borrower has a history of income ranging from 12-24 months, the PFI must use the actual number of months the borrower has received the income rather than 24 months. See section 5.3.1.2 Variable Income in for additional information about calculating variable income. |
5.3.9.205.3.9.20 Retirement, Government Annuity, and Pension Income
The following table provides verification requirements for retirement, government annuity, and pension income.
| ✓ | Verification of Retirement, Government Annuity, and Pension Income |
|---|
| | Document current receipt of the income, as verified by: - a statement from the organization providing the income,
- a copy of retirement award letter or benefit statement,
- a copy of financial or bank account statement,
- a copy of signed federal income tax return,
- an IRS W-2 form, or
- an IRS 1099 form.
|
| | 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. Note: The Borrower must have unrestricted access to the accounts without penalty. |
5.3.9.215.3.9.21 Royalty Payment Income
The following table provides verification requirements for royalty income.
| ✓ | Verification of Income from Royalty Payments |
|---|
| | Obtain copies of the: - royalty contract, agreement, or statement confirming amount, frequency, and duration of the income; and
- Borrower’s most recent signed federal income tax return, including the related IRS Form 1040, Schedule E.
|
| | 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. |
5.3.9.225.3.9.22 Schedule K-1 Income (5/9/24)
The following table provides verification of income requirements for Borrowers with less than 25% ownership of a partnership, an S corporation, or an LLC. For borrowers who have more than 25% ownership, PFIs must follow the verification of income requirements for self-employed borrowers. See 5.4.1 Underwriting Factors and Documentation for a Self-employed Borrower.
| ✓ | Verification of Schedule K-1 Income |
|---|
| | The borrower must provide the most recent two years of: - signed individual federal income tax returns, and
- IRS Schedule K-1.
|
| | Income reported on Schedule K-1 can only be considered if the PFI obtains documentation verifying that: - the income was actually distributed to the borrower and is consistent with the level of business income being used to qualify, or
- the business has adequate liquidity to support the withdrawal of earnings. The PFI may use discretion in the method used to confirm the business has adequate liquidity.
|
| | The PFI 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. Note: An exception to the two-year requirement of receiving “guaranteed payments to the partner” is if a Borrower has recently acquired nominal ownership in a professional services partnership (for example, a medical practice or a law firm) after having an established employment history with the partnership. In this situation, the PFI may rely on the Borrower’s guaranteed compensation. This must be evidenced by the Borrower’s partnership agreement and further supported by evidence of current year-to-date income. |
5.3.9.235.3.9.23 Social Security Income
The following table provides verification requirements for Social Security income.
| ✓ | 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 PFI 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. |
| Documentation Requirements |
|---|
| Type of Social Security benefit | Borrower is drawing Social Security benefits from own account/work record 1 | Borrower is drawing Social Security benefits from another person’s account/work record or from their own account/work record for the benefit of another2 |
| Retirement | - Social Security Administration's (SSA) Award letter,
- SSA-1099,
- Most recent signed federal income tax returns (or tax transcripts3), or
- Proof of current receipt
| - SSA Award letter,
- Proof of current receipt, and
- Three-year continuance4
|
| Disability | - SSA Award letter,
- SSA-1099,
- Most recent signed federal income tax returns (or tax transcripts3), or
- Proof of current receipt
| - SSA Award letter,
- Proof of current receipt, and
- Three-year continuance4
|
| Survivor benefits | NA | - SSA Award letter,
- Proof of current receipt, and
- Three-year continuance4
|
| Supplement Security Income (SSI) | - SSA Award letter, and
- Proof of current receipt
| NA |
1 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.
2 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).
3 If joint tax returns or tax transcripts include income that is not associated with a Borrower on the loan transaction, the PFI must obtain additional documentation supporting the amount of income from the SSA being used in qualifying, such as the SSA-1099.
4 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.
5.3.9.245.3.9.24 Temporary Leave Income
Temporary leave from work is generally employee-initiated short in duration and for reasons of maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or 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 PFI is made aware that a Borrower will be on temporary leave at the time of closing of the mortgage loan and that Borrower's income is needed to qualify for the mortgage loan, the PFI must determine allowable income and confirm employment as described below.
| ✓ | Temporary Leave -- Employment Requirements |
|---|
| | The Borrower's employment and income history must meet standard eligibility requirements as described in this Guide. |
| | The Borrower must provide written confirmation of his or her intent to return to work. |
| | The PFI 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 Age of Documents policy.) |
| | The PFI 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 PFI must obtain a verbal verification of employment in accordance with 5.3.7 Verbal Verification of Employment. If the employer confirms the Borrower is currently on temporary leave, the PFI must consider the Borrower employed. |
| | The PFI must verify the Borrower's income in accordance with 5.3 Income Assessment. The PFI must obtain; - the amount and duration of the Borrower's “temporary leave income,” which may require multiple documents or sources depending on the type and duration of the leave period; and
- the amount of the “regular employment income” the Borrower received prior to the temporary leave. Regular employment income includes, but is not limited to, the income the Borrower receives from employment on a regular basis that is eligible for qualifying purposes (for example, base pay, commissions, and bonus).
Note: Income verification may be provided by the Borrower, by the Borrower's employer, or by a third-party employment verification vendor. |
Requirements for Calculating Income Used for Qualifying
If the Borrower will return to work as of the first mortgage payment date, the PFI can consider the Borrower's regular employment income in qualifying.
If the Borrower will not return to work as of the first mortgage payment date, the PFI 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 his or her regular employment income, the PFI may supplement the temporary leave income with available liquid financial reserves (see Minimum Reserve Requirements). 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 mortgage payment date to the date the Borrower will begin receiving his or her regular employment income, rounded up to the next whole number.
After determining the supplemental income, the PFI 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.
Example:
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
Available liquid reserves: $12,000
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
Note: These requirements apply if the PFI 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 PFI must not ask if he or she intends to take leave in the future.
5.3.9.255.3.9.25 Tip Income
The following table provides verification requirements for tip income.
| ✓ | Verification of Tip Income |
|---|
| | Obtain the following documents: - a completed Request for Verification of Employment (Form 1005 or Form 1005(S)), or
- the Borrower’s recent paystub, and
- IRS W-2 forms covering the most recent two-year period or the most recent two years tax returns with IRS Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to verify tips not reported by the employer.
See 5.3.2 Standards for Employment Documentation, for additional information. |
| | Tip income may be used to qualify the Borrower if the PFI verifies that the Borrower has received it for the last two years. |
| | The PFI must determine the amount of tip income that may be considered in qualifying the Borrower. Refer to 5.3.1.2 Variable Income section for additional information. |
5.3.9.265.3.9.26 Trust Income (7/2/24)
The following table provides verification requirements for trust income.
| ✓ | To verify trust income the PFI 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: - Copy of the trust agreement,
- The trustee’s statement,
- The trust’s federal income tax returns, or
- A letter from an accountant or attorney who reviewed the trust documents, when the above documents are not available or when the Borrower is the trustee.
Note: A borrower who is also a trustee may not supply the trustee’s statement. - Confirm the trust was established for 12 months or longer, unless the following requirements are met:
- The trust verification documentation reflects fixed payments,
- The Borrower is not the grantor, and
- At least one payment is received prior to closing.
Trusts created in the previous 12 months using a borrower's eligible employment-related assets, as defined in 5.3.9.8 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 5.3.1 General Income Information. 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.
If eligible employment-related assets have been liquidated and placed into a trust within 12 months of the loan's application date, the income calculation requirements in 5.3.9.8 Employment-Related Assets as Qualifying Income apply.
| 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 5.3.1 General Income Information.
Document the following: - A minimum 24-month history of trust income by obtaining copies of the borrower's signed federal tax income tax returns for the most recent two years, and
- Current receipt of trust income with one month's bank statement or other equivalent documentation.
Note: Income received for 12 to 24 months may be considered as acceptable income when other positive factors are present that reasonably offset a shorter income history.
| |
5.3.9.275.3.9.27 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.) |
