B3-3.1-01, General Income Information
When it comes to getting a mortgage loan, your income plays a major role. Fannie Mae’s rule book has some guidelines on income and its sources. Let’s break it down.
Stable and Predictable Income
First, mortgage lenders like to see stable, regular income that’s likely to keep coming in. Even if you change jobs a lot, if you’re still making a consistent amount of money, that’s good.
For example, let’s say Bob is an electrician who bounces from contract to contract. As long as he’s earning a steady income, lenders will consider his income reliable.
If your income is less predictable, lenders will want to see your past earnings. Maybe you’re a car salesman and your income is based on commissions, or an actor who works on short-term contracts. Lenders will need information on what you’ve made in the past to get a sense of what you’ll make in the future.
Variable Income
Next, let’s talk about variable income, or income that changes regularly. This could be because of fluctuating hours at work, or if you earn commissions, bonuses, or overtime.
For instance, Sally is a nurse who sometimes picks up extra shifts, so her income varies. Lenders will look at her income history, how often she gets paid, and whether her income is going up or down.
If you have variable income, it’s best if you’ve been receiving it for at least two years. However, if you’ve only been getting it for 12-24 months, it can still be okay if you can show other positive factors.
History of Receipt
For example, if Sally has only been working overtime for a year, but she has a strong work history and a good credit score, her lender might still consider her overtime pay as acceptable income.
Frequency of Payment
Lenders will also look at how often you get paid. If you get an annual bonus, lenders will divide it by 12 to see what it contributes to your monthly income.
Income Trending
Then, lenders will compare your current income to your past earnings. If your income has been stable or increasing, they’ll average it out. If your income has gone down, they’ll use the lower amount, unless they think your income is not stable.
Continuity of Income
Lenders want to be confident that you’ll keep getting the income you’re using to qualify for the loan.
If you’re getting income that has a set end date, like a retirement account distribution, lenders will want to see that it’s likely to keep coming in for at least three years.
Let’s say Alice is receiving alimony, which has a defined end date. Her lender will need to document that she’ll keep receiving this income for at least three more years.
Determining the Need for Federal Income Tax Returns
Lenders might need to see your federal tax returns if your income comes from certain sources. For example, if you’re employed by a family member, or if you get income from a rental property, you’ll need to provide your tax returns.
Verification of Income for Non-U.S. Citizen Borrowers
If you’re a non-U.S. citizen, you’ll still need to verify your income. If you’re employed by a U.S. company or self-employed, the requirements are the same as for U.S. citizens. If you’re employed by a foreign company and paid in foreign currency, you’ll need to provide your federal tax returns and other documentation. All income must be translated to U.S. dollars.
Using Nontaxable Income to Adjust the Borrower’s Gross Income
Some types of income are nontaxable, like child support or certain public assistance payments. If you receive this type of income, lenders can “gross up” your income by adding an amount equivalent to 25% of the nontaxable income to your total income.
Reduced Income Documentation Requirements for High LTV Refinance Loans
For some high loan-to-value refinance loans, lenders may not need to follow the same income documentation requirements.
Income Paid in Virtual Currency
Finally, if you’re paid in virtual currency like cryptocurrencies, that income can’t be used to qualify for the loan.
References
For more details, visit General Income Information of the Fannie Mae Selling Guide.