- financial reserves, and
- current income.
Current income refers to net income that is currently being received by the borrower (or coborrower), 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 lender 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 lender using income documentation, such as a paystub, but a verification of employment is not required.
Employment-Related Assets as Qualifying Income
The following table provides the requirements for employment-related assets that may be used as qualifying income.
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.
“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.
IRA (made up of stocks and mutual funds)
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(Assumes a 10% penalty applies for early distribution, which must be levied against any cash being withdrawn for closing the transaction as well as the remaining funds used to calculate the income stream.)
Total eligible documented assets
Minus funds required for closing
(down payment, closing costs, reserves)
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.
All of the following loan parameters must be met in order for employment-related assets to be used as qualifying income:
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.
Note: If the mortgage loan does not meet the above parameters, employment-related assets may still be eligible under other standard income guidelines, such as “Interest and Dividends Income,” or “Retirement, Government Annuity, and Pension Income.”
Foreign Income
Foreign income is income that is earned by a borrower who is employed by a foreign corporation or a foreign government and is paid in foreign currency. Borrowers may use foreign income to qualify if the following requirements are met.
The lender must satisfy the standard documentation requirements based on the source and type of income as outlined in Chapter B3–3, Income Assessment.
All documents of a foreign origin must be completed in English, or the originator must provide a translation, attached to each document, and ensure the translation is complete and accurate.
Note: All income must be translated to U.S. dollars. If the borrower is not a U.S. citizen, refer to B2-2-02, Non–U.S. Citizen Borrower Eligibility RequirementsB2-2-02, Non–U.S. Citizen Borrower Eligibility Requirements , for additional information.
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.
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.
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.
Interest and Dividends Income
The following table provides verification requirements for interest and dividends income.
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.
Mortgage Credit Certificates
States and municipalities can issue mortgage credit certificates (MCCs) in place of, or as part of, their authority to issue mortgage revenue bonds. MCCs enable an eligible first-time homebuyer to obtain a mortgage secured by their principal residence and to claim a federal tax credit for a specified percentage (usually 20% to 25%) of the mortgage interest payments.
When calculating the borrower’s DTI ratio, treat the maximum possible MCC income as an addition to the borrower’s income, rather than as a reduction to the amount of the borrower’s mortgage payment. Use the following calculation when determining the available income:
[(Mortgage Amount) x (Note Rate) x (MCC %)] ÷ 12 = Amount added to borrower’s monthly income.
For example, if a borrower obtains a $100,000 mortgage that has a note rate of 7.5% and they are eligible for a 20% credit under the MCC program, the amount that should be added to their monthly income would be $125 ($100,000 x 7.5% x 20% = $1500 ÷ 12 = $125).
The lender must obtain a copy of the MCC and the lender’s documented calculation of the adjustment to the borrower’s income and include them in the loan file.
For refinance transactions, the lender may allow the MCC to remain in place as long as it obtains confirmation prior to loan closing from the MCC provider that the MCC remains in effect for the new loan. Copies of the MCC documents, including the reissue certification, must be maintained in the new loan file.
Note: Because the MCC is transaction specific, it does not have to comply with the Allowable Age of Credit Documents policy (see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns , for additional information).
Mortgage Differential Payments Income
An employer may subsidize an employee’s mortgage payments by paying all or part of the interest differential between the employee’s present and proposed mortgage payments.
When calculating the qualifying ratio, the differential payments should be added to the borrower’s gross income.
The payments may not be used to directly offset the mortgage payment, even if the employer pays them to the mortgage lender rather than to the borrower.
The following table provides verification requirements for mortgage differential payment income.
| ✓ | Verification of Income From Mortgage Differential Payments |
|---|---|
| Obtain written verification from the borrower’s employer confirming the subsidy and stating the amount and duration of the payments. | |
| Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. |
If this income is used on a purchase transaction, current receipt is not required to be documented except as verified in the employer letter. For refinance transactions where the income is continuing with the new loan, the recent receipt must be in compliance with the Allowable Age of Credit Documents policy (see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax ReturnsB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns , for additional information).
Non-Occupant Borrower Income
DU will consider a non-occupant borrower’s income as qualifying income for a principal residence with certain LTV ratio limitations.
For manually underwritten loans, the income from a non-occupant borrower may be considered as acceptable qualifying income. This income can offset certain weaknesses that may be in the occupant borrower’s loan application, such as limited income, financial reserves, or limited credit history. However, it may not be used to offset significant or recent instances of major derogatory credit in the occupant borrower’s credit history. The occupant borrower must still reasonably demonstrate a willingness to make the mortgage payments and maintain homeownership. If the income from a non-occupant borrower is used for qualifying, the LTV ratios are limited.
See B2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject TransactionB2-2-04, Guarantors, Co-Signers, or Non-Occupant Borrowers on the Subject Transaction , for information about the maximum LTV, CLTV, and HCLTV ratios that apply when non-occupant borrower income is used for qualifying purposes for both DU and manually underwritten loans.
Notes Receivable Income
The following table provides verification requirements for notes receivable income.
| ✓ | Verification of Income From Notes Receivable |
|---|---|
| Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. | |
| Obtain a copy of the note to establish the amount and length of payment. | |
| Document regular receipt of income for the most recent 12 months. |
Payments on a note executed within the past 12 months, regardless of the duration, may not be used as stable income.
Public Assistance Income
The following table provides verification requirements for public assistance income.
| ✓ | Verification of Public Assistance Income |
|---|---|
| Document the borrower’s receipt of public assistance income with letters or exhibits from the paying agency that state the amount, frequency, and duration of the benefit payments. | |
| Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. |
Section 8 Housing Choice Voucher Homeownership Program Payments
The Housing Choice Voucher Homeownership Program (more commonly known as Section 8) is also an acceptable source of qualifying income. There is no requirement for the Section 8 voucher payments to have been received for any period of time prior to the date of the mortgage application or for the payments to continue for any period of time from the date of the mortgage application.
Because this income is nontaxable, the lender should develop an adjusted gross income for the borrower. See B3-3.1-01, General Income InformationB3-3.1-01, General Income Information , for additional information.
Income from Unemployment Benefits
Income from unemployment benefits and any income from an employer-initiated action (such as furlough or layoff) are typically short-term in nature and can be considered when qualifying the borrower in the following scenarios:
- The income has been consistently received for at least two years as verified by copies of the signed federal income tax returns that reflect the unemployment income is associated with seasonal employment. See B3-3.1-05, Secondary Employment Income (Second Job and Multiple Jobs) and Seasonal IncomeB3-3.1-05, Secondary Employment Income (Second Job and Multiple Jobs) and Seasonal Income , for additional information.
- The income from unemployment benefits can be used in the calculation of financial resources that are required under Option 2 in Employment Offers and Contracts above.
- The income from unemployment benefits may be used in qualifying a borrower for a high LTV refinance loan. See B5-7-03, High LTV Refinance Alternative Qualification PathB5-7-03, High LTV Refinance Alternative Qualification Path .
Restricted Stock Units and Restricted Stock Employment Income
Restricted stock units and restricted stock (referred to collectively as "restricted stock") are granted by an employer to its employees as a form of compensation based on either performance or time. They can be awarded as either stock or an equivalent cash value of the number of shares awarded and usually vest over a certain number of years. After they vest, the employee may sell the shares at the current price or hold the stock for future sale.
The following table provides verification requirements for restricted stock income.
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.
Note: Sign-on bonuses received in the form of restricted stock that vest over any length of time cannot be considered by the lender as qualifying income.
The lender 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; and
- a completed Request for Verification of Employment (Form 1005) that shows restricted stock distributions, or the borrowers recent paystub showing receipt of restricted stock income and 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 is 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 total 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 lender may use the actual number of months the borrower has received the income rather than 24 months.
See Variable Income in B3-3.1-01, General Income InformationB3-3.1-01, General Income Information , for additional information about calculating variable income.
Retirement, Government Annuity, and Pension Income
The following table provides verification requirements for retirement, government annuity, and pension income.
Document current receipt of the income, as verified by one or more of the following:
- 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 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.
If a borrower’s retirement, annuity, or pension income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See B3-2-02, DU Validation ServiceB3-2-02, DU Validation Service .
Royalty Payment Income
The following table provides verification requirements for royalty income.
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.
Refer to the Variable Income section of B3-3.1-01, General Income InformationB3-3.1-01, General Income Information , for additional information.
Schedule K-1 Income
The following table provides verification of income requirements for borrowers who have less than 25% ownership of a partnership, S corporation, or limited liability company (LLC). For borrowers who have more than 25% ownership, lenders must follow the verification of income requirements for self-employed borrowers. See B3-3.2-01, Underwriting Factors and Documentation for a Self-Employed BorrowerB3-3.2-01, Underwriting Factors and Documentation for a Self-Employed Borrower for additional information.
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 lender 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 lender may use discretion in the method used to confirm the business has adequate liquidity.
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 lender 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.
Social Security Income
The following table provides verification requirements for Social Security income.
Social Security income based on another person's account/work record or from the borrower's own work record, but for the benefit of another (such as a dependent) may also be used in qualifying, provided the lender documents a 3-year continuance.
If a borrower’s Social Security income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See B3-2-02, DU Validation ServiceB3-2-02, DU Validation Service .
Temporary Leave Income
Temporary leave from work is generally employee-initiated, short in duration and for reasons including, but not limited to maternity or parental leave, short-term medical disability, or other temporary leave types that are acceptable by law or to the borrower's employer. Borrowers on temporary leave may or may not be paid during their absence from work.
Note: Mandatory leave initiated by an employer, such as a furlough or layoff, is not considered temporary leave regardless of an expected return to work date. For income from unemployment benefits received as a result of mandatory leave initiated by an employer, see Public Assistance Income above.
If a lender is made aware that a borrower will be on temporary leave at the time of the loan closing and that borrower's income is needed to qualify for the loan, the lender must determine allowable income and confirm employment as described below.
| ✓ | Temporary Leave -- Employment Requirements |
|---|---|
| The borrower's employment and income history must meet standard eligibility requirements as described in Section B3–3.1, Employment and Other Sources of Income. | |
| The borrower must provide written confirmation of their intent to return to work. | |
| The lender must document the borrower’s agreed-upon date of return by obtaining, either from the borrower or directly from the employer (or a designee of the employer when the employer is using the services of a third party to administer employee leave), documentation evidencing such date that has been produced by the employer or by a designee of the employer. |
Examples of the documentation may include, but are not limited to, previous correspondence from the employer or designee that specifies the duration of leave or expected return date or a computer printout from an employer or designee’s system of record. (This documentation does not have to comply with the Allowable Age of Credit Documents policy.)
The lender must verify the borrower's income in accordance with Section B3–3.1, Employment and Other Sources of Income. The lender 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 loan payment date, the lender can consider the borrower's regular employment income in qualifying.
If the borrower will not return to work as of the first loan payment date, the lender must use the lesser of the borrower's temporary leave income (if any) or regular employment income. If the borrower's temporary leave income is less than their regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves (see B3-4.1-01, Minimum Reserve RequirementsB3-4.1-01, Minimum Reserve Requirements ). The following are instructions on how to calculate the “supplemental income”:
Supplemental income amount = available liquid reserves divided by the number of months of supplemental income
- Available liquid reserves: subtract any funds needed to complete the transaction (down payment, closing costs, other required debt payoff, escrows, and minimum required reserves) from the total verified liquid asset amount.
- Number of months of supplemental income: the number of months from the first loan payment date to the date the borrower will begin receiving their regular employment income, rounded up to the next whole number.
After determining the supplemental income, the lender must calculate the total qualifying income.
Total qualifying income = supplemental income plus the temporary leave income
The total qualifying income that results may not exceed the borrower's regular employment income.
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 lender becomes aware through the employment and income verification process that the borrower is on temporary leave. If a borrower is not currently on temporary leave, the lender must not ask if they intend to take leave in the future.
Tip Income
The following table provides verification requirements for tip income.
Obtain the following documents:
- a completed Request for Verification of Employment (Form 1005), 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.
Trust Income
The following table provides verification requirements for trust income.
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:
- a 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 all of 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 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 B3-3.1-01, General Income InformationB3-3.1-01, 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.
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.
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 or copies of the trust's federal 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.
VA Benefits Income
The following table provides verification requirements for income from VA benefits.
Note: Education benefits are not acceptable income because they are offset by education expenses.
| ✓ | Verification of VA Benefits Income |
|---|---|
| Document the borrower’s receipt of VA benefits with a letter or distribution form from the VA. | |
| Verify that the income can be expected to continue for a minimum of three years from the date of the mortgage application. (Verification is not required for VA retirement or long-term disability benefits.) |
If a borrower's VA benefit income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See B3-2-02, DU Validation ServiceB3-2-02, DU Validation Service .
An SSA Award letter may be used to document the income if the borrower is receiving Social Security payments or if the borrower will begin receiving payments on or before the first payment date of the subject mortgage as confirmed by a recently issued award letter.
Examples of how a borrower might draw Social Security benefits from another person’s account/work record and use the income for qualifying:
- A borrower may be eligible for benefits from a spouse, ex-spouse, or dependent parents (the benefit is paid to the borrower on behalf of the spouse, etc.); or
- A borrower may use Social Security income received by a dependent (a minor or disabled dependent).
If joint tax returns or tax transcripts include income that is not associated with a borrower on the loan transaction, the lender must obtain additional documentation supporting the amount of income from the SSA being used in qualifying, such as the SSA-1099.
Confirmation of three-year continuance does not require documentation that provides a defined expiration date and can be assessed by verifying the SSA's requirements related to the specific benefit(s) being paid. For example, if the SSA ties receipt of the benefits to the beneficiary's age, confirmation of a three-year continuance can be met by verifying that the beneficiary's age supports that benefit(s) will continue for at least three years from the date of the loan application.
Recent Related AnnouncementsThe table below provides references to recently issued Announcements that are related to this topic.
| Announcements | Issue Date |
|---|---|
| Announcement SEL-2024-03 | May 01, 2024 |
| Announcement SEL-2024-02 | March 06, 2024 |
| Announcement SEL-2024-01 | February 07, 2024 |
| Announcement SEL-2023-11 | December 13, 2023 |
| Announcement SEL-2023-10 | November 01, 2023 |
| Announcement SEL-2023-08 | September 06, 2023 |
| Announcement SEL-2022-10 | December 14, 2022 |
| Announcement SEL-2022-09 | October 05, 2022 |
| Announcement SEL-2022-04 | May 04, 2022 |
| Announcement SEL-2021-11 | December 15, 2021 |
| Announcement SEL-2021-08 | September 01, 2021 |
| Announcement SEL-2020-07 | December 16, 2020 |
| Announcement SEL-2019-08 | October 02, 2019 |
| Announcement SEL-2019-07 | August 07, 2019 |
| Announcement SEL-2018-09 | December 04, 2018 |
| Announcement SEL-2018-08 | October 02, 2018 |
| Announcement SEL-2018-06 | August 07, 2018 |
