Calculating income for Alimony, Child Support or Separate Maintenance is done by using the actual amount being paid monthly. It must be documented that it will continue for at least three years after the date of the loan application and will need to be verified. A copy of the separation agreement or divorce decree that states the amount of the award and how long it will be ongoing for. This documentation is required even if the paying party has been paid voluntarily and can be documented. The legal document is required. If there is a different type of court document, written legal agreement, or court decree that shows the legal terms, this is also acceptable.
To be considered stable income, full regular payments must be documented as having been made for at least 6 months. Confirming that it will continue for at least three years sometimes means making sure if it is child support that the child will not age out of the agreement within the required three year timeframe. If so, that income would not be able to be used. It is worth noting here that a borrower receiving Alimony, Child Support or Separate Maintenance is not required to disclose it or use it for qualifying purposes and may opt to not disclose this information.
Income from Boarders in qualifying for a mortgage loan
Typically this income cannot be used for qualification purposes, though a couple of exceptions do exist. One is for a disabled borrower that lives in the home and receives rent from their live-in caregiver. The other exception is under the Fannie Mae HomeReady program for first time homebuyers where a limited amount of boarder income is allowed. The boarder cannot be on the mortgage loan, may not be related to the borrower and no more than 30% of total qualifying income can be from the boarder. This only applies to one unit properties and the boarder must have lived with and paid rent to the borrower for the last 12 months. This would be documented by canceled checks for rental payments and would need to be made to the borrower directly.
Calculation of Capital Gains Income for mortgage qualifying
If there is a two year history of capital gains income, use the most recent two years tax returns Schedule D and do a two year average. This is not a typical income source as it usually refers to a one time transaction. However, there are those who turn and purchase assets regularly and consistently have this as an income source. Tax returns would need to be current and allowable by the lender.
Figuring income from Long Term Disability in obtaining a mortgage loan
If the borrower is currently receiving payments of disability from a long term insurer, the amount being received and showing on the disability policy or benefits statement is the amount that is used. It may be used if there is not a defined expiration date and is expected to continue. If there is a re-evaluation date, this is not considered an expiration date. If the borrower is currently receiving short term disability that will convert within the next three years to a long term benefit, the long term amount is the amount that must be used for qualification purposes.
Foreign Income may be used as income for a home loan.
Foreign income is an acceptable source of income in obtaining a mortgage and must be documented by two years of tax return that show the income. All documents must be translated into English and currencies into US Dollars. All other rules for calculating income apply.
Income from a Foster-Care Home calculation on a home mortgage
Foster-Care income needs to be documented with verification letters from the organizations providing the income. There needs to be a history of the borrower having at least a two year tenure in providing foster-care services. If two years can’t be provided then a 12 month history is acceptable so long as the income doesn’t encompass more than 30% of the total income being used to qualify for the loan.
Special Income types like Housing or Parsonage Allowance and Mortgage Differential Payments can be used as additional income in qualifying for a mortgage
In the case where a faith leader or other worker has a monthly allowance to cover their housing cost, the amount may be added to the income, but not allowed to offset the housing payment. It must have been received for the past 12 months and expected to be ongoing for another three years. If the amount is not taxable it may be grossed up by another 25%. This does not apply to military quarters allowance.
A Mortgage Differential Payment is where an employer subsidizes and employee’s mortgage payments by an agreed amount that is the difference between the employee’s current housing payment and proposed new mortgage payment. The amount of the differential is added to the borrower’s gross income and payments are not used to offset the mortgage payment, even if the payments are made directly from the employer to the mortgage holder. This income needs to be verified that it will continue for at least three years from the application date. It is not necessary to proved that it is currently being provided if this is a home purchase. A letter from the employer stating the terms is sufficient.
Income from Notes Receivable is acceptable income for mortgage transactions
So long as the income is expected to continue for at least three more years from the mortgage application date and receipt of amount has been ongoing for the last three months this income can be used to qualify. Anything less than a 12 month history are not eligible as qualifying income, since it isn’t considered stable yet. A copy of the note and proof of receipt of payments is required to verify.
Using Public Assistance as a source of income on a home purchase or refinance
Letters or other exhibits from the state agency that provides this form of support can be used as documentation to support this income amount, how often it is paid and how long it is expected to be coming in. As in all other less common income sources, you need to be able to document that it will be ongoing for the next three years from the date of the loan application.
If you have a Housing Choice Voucher – also known as Section 8 – this is also a viable income source to qualify. You don’t have to show they have been received for any amount of time. Nor do you need to prove that they will continue for any period of time from the date of the mortgage application, which is not typical for most unusual income sources. It will be important to determine from the issuing agency what the monthly payment amount will be and if it is expected to be taxed. If it is not taxable, then the full amount may be grossed up or increased to account for the benefit not being taxable.
Borrowers receiving Unemployment Benefits in some cases may use this income to qualify
Borrowers with seasonal employment where a layoff comes every year and the unemployment insurance is consistently collected for at least two years, may use this income for qualification on the loan. Income tax returns and supporting documents would be required to confirm the situation.
In the case where a borrower is starting a new position and has an offer letter showing the specifics of the new position with salary and permanency, but the paystub will not be available until after closing, a calculation of assets is used to confirm that borrower can bridge the time span before the new salary starts. In this case these will use as part of those assets and financial reserves, any funds coming in as current income and that would include unemployment income.
When a borrower is receiving Royalty Payments this income can be used for obtaining a home loan
When the borrower has received at least 12 months of Royalties and they will continue for at least three years, this is a valid source of income. A copy of the contract or agreement showing the amount being received, how often it will be paid and for how long is required in order to confirm the amount. If the amount is variable, it will be averaged over the past two years history of what is reported to the IRS on the 1040 Schedule E.
Social Security income or long term disability (SSI) can sometimes be grossed up on a home loan
There are several ways that SS income can be used. It is considered ongoing and doesn’t have a defined expiration date so a copy of the award letter or 1099 and proof of current receipt is usually adequate for the amount. Additionally a copy of income tax returns will determine if these benefits are being taxed. Untaxed may be grossed up as high as an additional 25%.
A borrower may be drawing SS benefits from another persons work record or on behalf of another, such as a spouse, ex-spouse, dependent parents or on behalf a disabled dependent or survivor benefits. In one these cases there will need to be some proof that there will be at least a 3 year continuance from the date of the loan application.
Using Tip income to qualify for a mortgage
Tip income that is reported on the W-2 and/or to the IRS is easily documented and usable, so long as there is a two year history. If there are tips not reported by the employer then only those filed with the tax return IRS Form 4137 will suffice to verify tips not reported by the employer. An average of the two years is generally taken of the reported amounts.
Income from a Trust may be used as income on a mortgage application
Borrowers with Trust income will need to provide a copy of the trust agreement or the trustees statement showing the amount being received, how often and how long it is expected to continue. Income must continue for at least three years from the date of the loan application. Documentation of the most recent receipt should be provided to substantiate the amount and income.
Some types of income are harder to use or may not be eligible on many programs and these include:
- Automobile allowances
- Expense account payments
- Gambling income·
- Nontraditional currencies such as Bitcoin, digital assets, or other cryptocurrencies
- Proceeds from a reverse mortgage or other financing (may be allowed for cash for closing, but not income)
- Rent from:
- Boarders living in the borrower’s primary residence or second home
- A property that is the borrower’s second home
- Retained earnings in a company
- VA education benefits – education benefits used to offset education expenses are not acceptable
Conclusion
Any other types of income that may be unusual should follow the same rule and be allowable, so long as it is a Federally legal income. Those rules are:
- A 12 month history of the income
- Income will continue for the next 3 years from the date of the loan application
- The income can be documented as received and ongoing by appropriate paperwork and IRS tax returns.
An example of income that might not be Federally legal would be various cannabis operations. While these may be legal in many states, they are not considered legal income by the Federal government and therefore do not qualify for Federally sponsored loan programs such as Fannie Mae, Freddie Mac, FHA, VA, or USDA. There are other programs that may work for that type of income. See your mortgage broker for options and details.
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