9.3: Annual Income [7 CFR 3555.10]

Annual income is used as the basis for computing adjusted annual income and is based on anticipated income for the coming year.  Income from all adult household members, not just parties to the note, must be considered when computing annual income.  This income calculation is utilized to determine the eligibility of the household for the SFHGLP.  This paragraph provides additional information to help the lender calculate annual income properly.

A. Income that is Never Counted

The following income is never counted as annual income:

• Income received by live-in aides, regardless of whether the live-in aide is paid by the family or a social service program. Family members cannot be considered live-in aides unless they are being paid by a health agency and have an address, other than a post office box, elsewhere.
• Earned income of a minor. There is an exception for earned income from a spouse who is a minor or unearned income attributable to a minor, such as child support, Temporary Assistance for Needy Families (TANF) payments, and other benefits paid on behalf of a minor.  
• Employer provided fringe benefit packages, even if displayed on the applicants’ pay statements, are not considered in annual income unless reported as taxable income to the Internal Revenue Service (IRS). 
• Amounts granted for, or in reimbursement of, the cost of medical expenses.
• Earnings of full-time students 18 years of age, or older, in excess of $480 unless a spouse or head of household.
• Reparation payments paid by a foreign government arising out of the Holocaust.  If any applicant for an Agency loan was deemed ineligible because the applicant's income exceeded the low-income limit because of the applicant's Nazi persecution benefits, the Approval Official Loan should notify the applicant to reapply for a loan.
• Temporary, nonrecurring, or sporadic income (including gifts).
• Lump sum additions to family assets such as inheritances; capital gains, insurance payments under health, accident, or worker’s compensation policies; settlements for personal or property losses; and deferred periodic payments of supplemental social security income and Social Security benefits received in a lump sum. 
• Any earned income tax credit.
• Adoption assistance payments in excess of $480 per adopted child.
• Amounts received by the family in the form of refunds or rebates under State or local law for property taxes paid on the dwelling.
• Amounts paid by State agency to a family with a developmentally disabled family member living at home to offset the cost of services and equipment needed to keep the developmentally disabled family member at home.
• The full amount of any student financial aid received by household members.
• Deferred periodic payments of supplemental security income and Social Security benefits that are received in a lump sum amount or in prospective monthly amounts. 
• Special-Purpose Payments. These are payments made to the applicant's household that would be discontinued if not spent for a specific purpose. Payments which are intended to defray specific expenses of an unusual nature and which are expended solely for those expenses should not be considered as income. Examples include, but are not necessarily limited to, the following: 
• Medical Expenses. Funds provided by a charitable organization to defray medical expenses, to the extent to which they are actually spent to meet those expenses. 
• Supplemental Nutrition Assistance Program (SNAP) (formerly the Food Stamp Program). 
• Income received for the care of foster children or foster adults who live in the household. 
• The amount of Section 8 housing vouchers.
• Amounts received by any family member participating in programs under the Workforce Investment Act of 1998 (29 U.S.C. 2931):
• Amounts received by a person with a disability that are disregarded for a limited time for purposes of Supplemental Security Income eligibility and benefits because they are set aside for use under a Plan to Attain SelfSufficiency (PASS).
• Amounts received by a participant in other publicly assisted programs which are specifically for or in reimbursement of out-of-pocket expenses incurred (special equipment, clothing, transportation, child care, etc.) and which are made solely to allow participation in a specific program.
• Incremental earnings and benefits resulting to any family members from participation in qualifying State or local employment training programs (including training programs not affiliated with a local government) and training of a family member as resident management staff. Amounts excluded by this provision must be received under employment training programs with clearly defined goals and objectives, and are excluded only for the period during which the family participates in the employment training program.
• Allowances, earnings and payments to AmeriCorps participants under the National and Community Service Act of 1990 (42 E.S.C. 12637{d}). 
• Payments received on reverse amortization mortgages (these payments are considered a drawdown on the applicant’s assets).
• Any amount of crime victim compensation received through crime victim assistance (or payment or reimbursement of the cost of such assistance) because of the commission of a crime against the applicant under the Victims of Crime Act (42U.S.C. 10602). 
• Any allowance paid under 38 U.S.C. 1805 to a child suffering from spina bifida who is the child of a Vietnam veteran. 
• Payments by the Indian Claims Commission to the Confederated Tribes and Bands of Yakima Indian Nation or the Apache Tribe of Mescalero Reservation (Pub. L. 95433). 
• Housing assistance payment (HAP) (HUD’S Housing Choice Voucher

Homeownership Program, sometimes referred to as Section 8 for Homeownership). The HAP is not included in the household’s annual income for the purpose of determining the income category in which the household falls or determining payment assistance.

•  Any other revenue exempted by a Federal statute, a detailed list can be viewed in Attachment 9-C of this Chapter.  

B. Projecting Annual Income for a 12-Month Period

The calculation of annual income is used to determine an applicant’s eligibility for the SFHGLP.  Income received by the applicant and all adult members of the household is considered in the calculation of annual income.  Annual income is the first step in determining program eligible income.  Paragraph 9.5 discusses the calculation of adjusted annual income in determining program eligibility of the household.  The calculation of annual income may differ from repayment income.  Repayment income is based upon stable and dependable income of the applicants only.

Income Sources Considered for Annual Income.  Current income and family circumstances should be used to estimate the household’s annual income over the coming 12 months, unless there is verifiable evidence of a likely change in circumstances or historical data does not support current income.  For annual income, consider income that is attributable to any household member.

• Use the gross amount, before any payroll deductions, of base wages and salaries, overtime pay, commissions, fees, tips, bonuses, housing allowances and other compensations for personal services of all adult members of the household.  If a cost of living allowance or a proposed increase in income has been estimated to take place on or before loan approval, it will be included in the annual income calculation to determine household eligibility for the SFHGLP.
• For the annual income calculation, count only the first $480 of earned income from adult full-time students who are not the applicant, co-applicant, or spouse.
• The income of an applicant’s spouse, unless the spouse has been living apart from the applicant for at least 3 months (for reasons other than military or work assignment), or court proceedings for divorce or legal separation have been commenced will be included in the calculation of annual income.
• The net income from the operation of a farm, business, or profession. The following provisions apply:
• Expenditures for business or farm expansion, capital improvements, or payments of principal on capital indebtedness shall not be used as deductions in determining income. A deduction is allowed in the manner prescribed by Internal Revenue Service (IRS) regulations only for interest paid in amortizing capital indebtedness.
• Farm and non-farm business losses are considered "0" in determining annual income. A negative amount must not be used to offset other family income.
• A deduction, based on straight line depreciation, is allowed in the manner prescribed by IRS regulations for the exhaustion, wear and tear, and obsolescence of depreciable property used in the operation of a farm, business, or profession by a member of the household. The deduction must be based on an itemized schedule showing the amount of straight-line depreciation. 
• Any withdrawal of cash or assets from the operation of a farm, business, or profession, or salaries or other amounts distributed to family members from the farm, business, or profession, will be included in income, except to the extent the withdrawal is for reimbursement of cash or assets invested in the operation by a member of the household.
• A deduction is allowed for verified business expenses, such as lodging, meals, and fuel, for business trips made by salaried employees, such as long-distance truck drivers, who must meet these expenses without reimbursement.
• For home-based operations such as child care, product sales, and the production of crafts, housing related expenses for the property being financed such as mortgage interest, real estate taxes, and insurance, which may be claimed as business expense deductions for income tax purposes, will not be deducted from annual income.
• Interest, dividends, and other net income of any kind from real or personal property, including:
• The share received by adult members of the household from income distributed from a trust fund.
• Any withdrawal of cash or assets from an investment except to the extent the withdrawal is reimbursement of cash or assets invested by a member of the household.
• Where the household has net family assets in excess of $5,000, the greater of the actual income derived from all net family assets or a percentage of the value of assets based on the current passbook savings rate.
• The full amount of periodic payments received from Social Security (including Social Security received by adults on behalf of minors or by minors intended for their own support), annuities, insurance policies, retirement funds, pensions, disability or death benefits, and other similar types of periodic receipts. However, deferred periodic amounts from supplemental income and social security benefits that are received in a lump sum amount or in prospective monthly amounts are not counted.
• Payments in lieu of earnings, such as unemployment and disability compensation, worker’s compensation, and severance pay. 
• Public assistance unless excluded by law.
• Periodic allowances, such as:
• Alimony and child support awarded by the court in a divorce decree or separation agreement unless the applicant certifies the payments are not received, and the applicant provides documentation that he or she has taken all reasonable legal actions to collect amounts due, including filing with the appropriate courts or agencies responsible for enforcing payment; or
• Recurring monetary gifts or contributions from an organization or person who is not a member of the household.
• All regular pay, special pay (except for persons exposed to hostile fire), and allowances of a member of the armed forces who is the applicant or spouse, whether or not that family member lives in the home.

Calculation of Annual Income.  Historical data may be utilized to project annual income in certain circumstances.  For example, if one of the household members works overtime in the winter, but the income is being verified in the summer, historical overtime may be used to determine annual income.  Historical information may also be used to estimate annual income that is anticipated to be received for less than 12 months.  For example, if one of the household members is a seasonal worker, the income attributable to that worker should be based upon past history, rather than annualizing current income.

For example, assume a family member who currently has no income, historically has seasonal income during the summer months and earnings on the average of $4,000 during that time.  Confirm with the applicant and employer that the same seasonable pattern is expected and use historical data to project the annual income for the coming 12 months.

If any adult member of the household is not presently employed but there is a recent history of such employment, that person’s income will be considered in the calculation of annual household income.  If the person involved is not presently employed and does not intend to resume employment in the foreseeable future, or if interest assistance is involved (See Appendix 6), during the term of the Interest Assistance Agreement, the applicant(s) and the person involved must sign a statement to such.  The statement will be filed in the permanent loan file.

Once the income source is verified, the lender must project the expected income from this source for the next 12 months.  This calculation is used only to determine the household eligibility for the SFHGLP.  This calculation does not necessarily represent stable and dependable income for qualifying the loan.  This projection should be based on a comparison and analysis of the figures derived to establish earning trends and avoid underestimating annual income for the household.  The calculation of annual income must be the most representative of income likely to be received during the next 12 months.  Conservatively selecting the lowest projected income figure without analysis is not acceptable.  The following methods represent examples of calculating annual income.  Regardless of the method utilized, the lender’s mortgage file must contain written documentation on how the lender calculated annual income.  

C. Income of Temporarily Absent Family Members

Household members may be temporarily absent from the household for a variety of reasons, such as temporary employment or students who live away from home during the school year.  The income of these household members is considered when computing annual income, except that for full-time students only the first $480 of earnings is counted. 

A student is considered a member of the household if either of the following conditions is met:

• The student lives or proposes to live in the dwelling at any time during the coming 12 months; or
• The property is listed as the student’s permanent address.

If the absent person is not considered a member of the household and is not a party to the note, the lender must not count that individual’s income when calculating annual income, must not consider that person when determining deductions for adjusted annual income, and must not consider that individual as a family member when determining which income limit to use.

D.    Applicant Assets

Assets are also included in the calculation of annual income.  The method in which assets are counted in annual income is described in Paragraph 9.4.

E.    Verification Requirements

The applicant must provide the income, expense, and household information needed to enable the lender to make income determinations.  Lenders must verify income information provided by the applicant. Written or oral verifications provided by thirdparty sources or documents prepared by third-party sources are acceptable.  Oral verifications, or re-verifications, must be documented in the loan applicant’s file, including the date the verification was obtained, the name of the source, and the name of the lender employee conducting the review.  Facsimiles, photocopies, computer images and computer-generated documents may be used instead of original forms.  The lender is responsible for the integrity and accuracy of the information in the mortgage underwriting file.  Regardless of the type of documentation used to support the loan application, the documents must be legible and free of any alternations, erasures, “whiteouts,” or similar indications that changes have been made.  

Eligibility for the SFHGLP through the calculation of annual income is based upon all income received in the household, regardless if the adult household member is a party to the loan transaction.  To accurately determine annual income for the household, the lender must also verify income from adult members of the household who do not intend to be a party to the note in addition to those members requesting the mortgage loan.  To validate income documentation and disclosure provided by the applicant’s and other adult household members that will reside in the home, Lenders will require each adult member of the household to complete and execute IRS Form 4506-T (or comparable IRS form) for the previous two years at the time of loan application.  Validation from IRS must be received prior to request for Conditional Commitment for Loan Note Guarantee as further noted in this section.  The information received from the IRS is not intended to document income, but to validate the income documentation and disclosures provided by the applicant(s) and adult members of the household.

Verification and documentation of household annual income will be retained in the lender’s permanent case file.  It may be supported by any method noted below.  Credit documents, regardless of documentation method selected below cannot be greater than 120 days old at time of loan closing.  Exceptions include divorce decrees and income tax returns which are typically unaffected by time.  Lenders will verify the income for each adult household member, for the previous 2 years, prior to loan application.  The documents must not contain any alternations, erasures, correction fluid, or correction tape.  Household annual income, together with eligible adjustments outlined below determines eligibility for the SFHGLP. 

1. Full Documentation

When utilizing full documentation, the file must contain the following, as applicable:

Employment Income.  Form RD 1910-5, “Request for Verification of Employment” or its equivalent HUD, VA, Fannie Mae or Freddie Mac form to verify the applicant’s current, year-to-date, and previous year’s employment earnings.  Employment income may include base income, overtime, bonus, commissions or other income earned.  The most recent paycheck stubs will be obtained directly from the applicant to support or clarify income information provided.  The paycheck stub must clearly indicate that the applicant is the employee and reflect year to date (YTD) earnings.  If the documentation is from a third-party, such as an employer verification of income, it must be provided directly to the lender.  

Bonus, Commission or Overtime Income.  For employment income that includes bonus, commission or overtime, lenders must consider the previous history of these income types from the same employer (or same line of work) together with the employment verification of continuance when calculating annual income.  

Employee Differential Payments/Housing Allowances.  Include this type of payments as gross income when calculating annual income.

• Automobile/Expense Allowance/Per Diem.  If the allowance/reimbursement is shown on the earnings statement as “gross earnings” it must be included in the annual income calculation. 
• Unreimbursed Employee Expenses.  The amount of unreimbursed employee expenses will be deducted from the calculation of annual income when supported on IRS Form 2106, “Employee Business Expenses.”  The sum of columns A and B on Line 8 of the form represent the total amount expensed personally by the employee.

Military Income.  Pay allowances and other types of income should be included in the calculation of annual income when there is a history of receipt and will continue to be paid.  The hazardous duty pay to a service person exposed to hostile fire will not be included in the calculation of annual income.  

Self-Employed Income.  Self-employed income will be verified with two consecutive years of signed Federal income tax returns filed with the IRS including all applicable attached schedules.   Signed business tax returns for the most recent two years with all applicable schedules, year-to-date profit and loss and balance statements are required, but are not required to be audited.  As an alternative, the lender may obtain IRS-issued transcripts of the applicant’s tax returns, as long as the transcripts include the information from all applicable schedules.  In all cases, the lender must obtain sufficient documentation to support their determination of income.  The lender is encouraged to utilize Fannie Mae Form 1084, “Cash Flow Analysis” and Fannie Mae Form 1088, “Comparative Income Analysis” to document a trend analysis for the applicant’s business. A business with a loss will be considered zero for the annual income calculation.

Non-employed Income.  A copy of the most recent award letter, pension statement IRS 1099, verification through individual federal income tax returns for the most recent tax year or other appropriate documents for, other non-employed income.  Documentation must be dated within the last 12 months.  Examples of other income types can include alimony/child support, pension/retirement income, social security/disability income, trust income, notes receivable, etc.  

• Unemployment Income.  Unemployment compensation must be computed as the estimated amount for the upcoming 12 months with consideration to the history of this income type for the previous 12 months.
• Retirement Income.  Retirement payments that have a history of receipt and will continue for the next 12 months will be included in the annual income calculation.
• Public Assistance Income.  A copy of the most recent award or benefit letter for public assistance.  Documentation must be dated within the last 12 months.
• Child Support or Alimony Income.  A copy of the divorce decree, separation agreement or other document indicating the amount of required alimony or child support payments.  Obtain proof of receipt of payments from one of the following:  Court payment records or cancelled checks or bank statements clearly showing the deposit for the subject income.  If an applicant who is separated does not have a separation agreement that specifies alimony or child support payments, the lender should consider any voluntary payment that is reoccurring for qualifying the household for

the SFHGLP.  Alternatively, if the court ordered payments are not received for an extended period of time and a reasonable effort has been made by the applicant to collect them through the official entity responsible for enforcing such payments, court ordered payments may be excluded from the annual income calculation.  It remains the lenders responsibility to document the permanent loan file with the evidence to support excluding court ordered payments.    

Interest on Liquid Depository Accounts Asset Income.  Form RD 1944-62, “Request for Verification of Deposit (VOD)” or similar form acceptable to investors to verify liquid assets of the applicant(s).  Examples of liquid assets could include checking accounts, savings accounts, certificate of deposit and/or money market accounts held by the applicant(s).  When utilizing the direct verification method, the lender must send the request form directly to the applicant’s depositories or account holders.  

As an alternative to obtaining a written VOD, the lender may verify assets by obtaining the most recent two consecutive monthly bank statements provided the statements are reflective of the previous month’s balance.  Assets will be calculated by a two month average balance.  The purpose of this calculation is to determine cash reserves.  

Banks calculate the average monthly balance by adding together each daily closing account balance throughout the month.  The sum of the daily account balances are divided by the number of days in the month.  For example, if the daily account balances is $1,345, which is divided by 30 for the number of days in April, the average monthly balance is $48.33.  In lieu of this calculation, lenders may utilize the lowest ending daily balance on a given day of each month and divide by 2 to obtain the average monthly balance.  Take into consideration overdrafts and insufficient fund fees (NSF) as this day would represent zero.

See Paragraph 9.4 of this Chapter for additional guidance on household assets.

Net Family Assets Income.  Documentation of income from net family assets in accordance with 7 CFR 3555.152(d), must be included in the calculation of annual income.  Lenders utilizing the Agency’s automated underwriting system, GUS, will verify and document assets as part of the annual income calculation to determine the eligibility of the household.  Income derived from assets, in accordance with 7 CFR 3555.152(d), will appear on the Eligibility page of GUS.  Assets are not required to be populated on the Assets and Liabilities page of GUS.  If populated, the lender is representing they have confirmed assets of the amount input have been verified in accordance with this Chapter.   See Paragraph 9.4 of this Chapter for calculation and documentation of income from net family assets.  

• Seasonal Employment Income.  Seasonal employment must be supported with the most recent two year history of Federal income tax returns, W-2’s and/or 1099 statements.  
• Rental Income.  Refer to Paragraph 8.2 of Chapter 8 for eligibility and documentation standards for applicants who retain a rental.  
• Other Income.  Unemployment benefits, disability and Worker’s Compensation must be supported with the most recent award or benefit letter prepared and signed by the authorizing agency to verify the non-employment income.  Computed annual income will be the estimated amount for the upcoming 12 months with consideration to the history of this type of income for the previous 12 months.  Certain types of income are not considered in the calculation of annual income.  Refer 7 CFR 3555.152(b) (5) for additional information on excluded other income.
• Verification of Gifts.  Document through an executed gift donor letter; obtain proof of transfer from the donor to the applicant by obtaining a copy of the canceled check or other withdrawal document showing the withdrawal is from the donor’s personal account, along with the homebuyer’s deposit slip or bank statement that indicates the deposit.    Establish the gift does not have to be repaid.  Funds may be provided by the applicant’s relative, employer or labor union, charitable organization, or government agency/public entity that has a program to provide homeownership assistance to low and moderate income applicants.  Funds received from non-profit entities may not be used to pay installment loans, credit cards, collections, judgments, or other similar debts of the applicant.  To the greatest extent possible, the donor must be able to furnish conclusive evidence that the funds given to the homebuyer came from the donor’s own funds, and were not provided directly or indirectly by the seller, real estate agent, builder, or any other entity with an interest in the sales transaction.  

Gift funds in applicant’s bank account at time of loan application.   Document the transfer of the funds from the donor to the homebuyer by obtaining a copy of the canceled check or other withdrawal document showing that the funds are from the donor’s account.  Evidence the homebuyer deposited the gift into their personal account is required.

Gift funds provided at loan closing.  If the gift funds are not verified in the applicant’s account at time of application and the transfer occurs at closing, the lender remains responsible for obtaining verification that the closing agent received funds from the donor for the amount of the purported gift and that the funds came from an acceptable source.  Acceptable documentation includes 1) if the transfer of funds is by certified check, obtain a bank statement to document the withdrawal from the donor’s account with a copy of the certified check or 2) if the transfer of gift funds is from a donor purchased cashier’s check, money order, official check or bank check – obtain a withdrawal document or canceled check for the amount of the gift to evidence the funds came from the donor’s personal account or 3) if the transfer of funds was via a wire transfer, obtain a wire transfer confirmation to verify the settlement agent received the funds from the donor for the amount of gift.  “Cash on hand” is not an acceptable source of funds.

      Gift funds should be reflected on the application as a separate entry to the applicant’s depository account(s).  Gift funds should not be reflected in applicant’s depository account balances. Gift funds will not be considered as cash reserves or a compensating factor in the underwriting decision.

      Once gift funds are documented, verified and received, for the purposes of loan settlement, gift funds are considered the applicant’s personal funds.  Any excess funds at settlement that represent gift funds contributed may be returned to the applicant.

The following additional documentation is required to qualify the applicant for program eligibility in the calculation of adjusted annual income:

• Child Care.  Documentation of reasonable anticipated child care expenses for the ensuing 12 months.  Documentation can be obtained from the provider, or supported by receipts, income tax returns, etc. Third party verifications provided by a licensed childcare facility or provider on official letterhead are acceptable when the document includes the name of the child enrolled, the date of enrollment, the monthly payment due, and payment history.  Letters prepared by relatives or private individuals must include the same information as a third party verification and must include evidence of payments made (i.e. canceled checks, money order receipts, bank statements, etc.)  Applicants who have not yet placed their child into care or have no evidence to support payments made will be unable to qualify for this deduction.  Child support payments or private school tuition (kindergarten through minor children up to 12 years of age) paid by an applicant are not eligible child care expenses.  With qualifying documentation, reasonable child care can be deducted as long as it enables a family member to work, to actively seek work, or to further a member’s education as long as they are not reimbursed or paid by another source and the minor is 12 years of age or under.  The childcare provider cannot be a household member.  The deduction cannot exceed the amount of income, including the value of any health benefits, earned by the family member enabled to work.  To qualify for the deduction, the applicant must 1) identify the children receiving child care and the family member who can work or go to school as a result of the care; 2) demonstrate there is no adult household member available to care for the children; 3) identify the child care provider, hours of care provided and costs; and identify the educational institution and provide documentation of enrollment (if appropriate).  Attachment 9G to this chapter provides a sample format for requesting childcare information.
• Dependent Documentation.  Documentation from the school that a dependent over the age of 18, who resides in the household as their primary residence, is enrolled as a full-time student.  This type of documentation allows a deduction to annual income for a dependent meeting these criteria.  

Unborn children are not household members.  If it is unclear if a household member may claim a minor child as a household member and for the purpose of a dependent deduction, IRS Publication No. 502 considers the custodial parent as the one authorized to claim the dependent on a Federal income tax return.  Lenders may validate the household member is authorized to claim as a dependent by supporting their permanent file with a divorce decree, custody agreement and/or a Federal income tax return.

• Disability.  Form RD 1944-4, “Certification of Disability or Handicap” to verify a disability or other evidence that supports a member of the household has a disability.  Evidence of other documentation can be receipts, copies of billing statements, invoices, or other written documentation supporting the expenses.  Documentation of reasonable expenses related to the care of household members that allow a family member or the individual with disabilities to work, to actively seek work, or to further a member’s education as long as the expenses are not reimbursed from insurance or another source and represent in excess of 3 percent of the household’s annual income and do not exceed the amount of earned income of the person able to work.  A deduction to annual income for disability expenses is only applicable to disabled households as further explained in Paragraph 9.5 of this Chapter; and
• Medical Expenses.  Documentation of medical expenses anticipated to be incurred over the ensuing 12 months, as necessary.  Documentation can be in the form of receipts, billing statements, or evidence of payment, etc.  Consider only the portion in excess of 3% of the annual income that was not reimbursed by Medicare or insurance.  Some examples of medical expenses are hospital, doctor, dentist, prescriptions, etc.  A deduction to annual income for medical expenses is only applicable to elderly or disabled households as further explained in Paragraph 9.5 of this Chapter. 

2. Alternative Documentation

When utilizing this form of documentation, the lender’s permanent file must contain the following for employed applicants and/or adult household members. Alternative documentation does not apply to self-employed applicants:

• W-2 forms for the previous two tax years which may be obtained directly from the applicant and must clearly identify the applicant as the employee; and
• Paycheck stubs or payroll earnings statements covering the most recent 30 day period, which show the applicant’s gross earnings for both the most recent pay period and year-to-date.  If these documents are obtained directly from the applicant, the document must clearly identify the employee by name and/or social security number, the employer’s name and source of information; and
• An oral verification from the current employer.  This must be substantiated by a written document prepared by a representative or employee of the lender that includes the name, address, and phone number of the employer, the name and title of the person contacted, the applicant’s name, date of employment and present position, probability of continued employment, amount of current base pay, amount of other income such as overtime, bonus, commissions, etc… likelihood that the level of current earnings will continue and the lender’s signature and date verified.  Some employers will not release certain detailed information over the telephone, for example, amount of current earnings.  This is acceptable provided the paycheck stubs or payroll earnings statements contain this information.  The oral verification can also be used to supplement the full documentation verification when the written documentation is not clear or incomplete. 

3. Electronic Verifications of Employment

Employers may provide electronic access to employment and income verification information, and there are several companies that obtain information directly from participating employers in order to provide lenders with employee and income verifications.  When utilizing this form of documentation, the automated verification must provide essentially the same detailed employment and income information that is obtained using the full documentation employment verification form, including year-todate and previous year’s pay history.  All verifications must pass directly between the loan originator and the employer.  The file must contain the following:

• Electronic verification or other computer-generated documents accessed and printed from an Intranet or Internet.  The electronic verification or other computer-generated document accessed and printed must cover the most recent pay period as of the date the initial loan application is made; clearly identify the applicant as the employee by name and/or social security number and show the applicant’s gross earnings for the most recent 30-day period and year-to-date; and
• W-2 forms for the previous two tax years which may be obtained directly from the applicant and must clearly identify the applicant as the employee. 

4. Expiration of Credit Documents

Credit documents utilized to qualify the applicant(s) must be no more than 120 days old on the date the note is signed.  When the age of documents is greater than allowed, the lender must obtain updated verifications that support the applicants continued eligibility.  Credit documents represent the loan application package, including the applicant’s loan application, forms used to verify an applicant’s employment, income, assets, credit report, etc.  

Prior to loan closing, lenders are required to obtain a verbal verification of employment for all salaried applicants within 10 business days (prior to the note date).  Lenders will confirm with a third party source the existence of an applicant’s business no more than 30 calendar days prior to the note date for self-employed applicants.  Acceptable third party sources include, but are not limited to, a regulatory agency, the phone directory, the internet directory assistance or the applicable licensing bureau.  A verbal verification of the existence of the business will require the lender to document the name and address of the business and the date the information was verified and name and title of who obtained the verification.  Documentation to support this step will be retained in the lender’s permanent loan file. 

5. Use of Documents Handled by Third Parties

Lenders may not accept or use documents relating to the credit, employment or income of borrowers that have been handled by, or transmitted from or through the equipment of interested third parties such as:  real estate agents, builders, or sellers. 

6. Validation of Household Income

Lenders must require each adult member of the household (regardless of income source) to complete and sign IRS Form 4506-T (or comparable IRS form) for the previous two tax years at the time of loan application.  IRS Form 4506-T is an efficient method for lenders to receive and validate a household member’s income tax information electronically.  

Transcripts available through submission of IRS Form 4506-T include the 1040 U.S. Individual Income Tax Return, W-2 Wage & Tax Statement, 1099 Dividends/Interest, Miscellaneous Income, Government Payments, Cancellation of Debt, etc. along with other tax series forms.  Lenders must determine what transcripts are necessary to validate the household income of applicants.

Guaranteed loans cannot be made to household’s that exceed the applicable adjusted annual income limits.  The transcripts provide an excellent quality control check for lender’s to ensure all income and asset earnings reported to the IRS from all adult household members has been disclosed.  

IRS transcripts will assist lenders to validate applicant and adult household income and assets for many common circumstances that may include but are not limited to: 

• Accuracy of an applicant’s income and tax documentation.
• Accuracy of an applicant’s Social Security number.
• Combat mortgage fraud.
• Single loan applicants that previously filed a joint tax return.
• Applicant’s that have changed jobs/current line of work. 
• Recent promotions. 
• Compensation structure changes (base to commission, salary versus hourly). 
• Bonus or overtime compensation that is being received now, but has not in the past. 
• Undisclosed net family assets earning interest. 
• Undisclosed self-employment or part-time employment. 
• Applicant or household members that do not earn enough income to require the filing of a federal tax return.  

If the IRS transcripts reveal additional income or asset sources that were not previously disclosed, the lender must follow up and verify these income sources.  Any discrepancies noted in the IRS returned transcripts must be documented in the lender’s permanent loan case file.

Documentation.  Lenders must have the information returned from the IRS prior to submission of a request for a conditional commitment for loan note guarantee.  This could include a “no record” result when a member of the household did not file a tax return for the year(s) requested.  

Rejected files from the IRS are often a result of incomplete, illegible forms, or miss matched information when ordering the tax transcript.  Lenders are reminded the form must be fully completed and accurate to avoid rejection.    

When the lender is unsuccessful in obtaining the transcripts themselves, the Agency permits the following alternative method to validating household income in limited situations.  This method is typically utilized when the automated return message from IRS is due to “limitations”.  This type of message usually indicates the tax payer’s tax return transcript has been flagged by IRS due to possible identity theft.   

1. Lender must retain evidence IRS could not fulfill their online request in the permanent loan file.
2. The applicant may order their own transcripts and deliver them to the lender.
3. All schedules must be requested by the applicant for the previous two tax years.  If the applicant has not filed the previous tax year, request the two years previous to the most recent tax filing year and support the most recent tax filing year with verification of previous year earnings, together with current income verifications as noted in 7 CFR 3555, § 3555.152 and HB-1-3555 Chapter 9 at Paragraph 9.3.C.

IRS transcripts and further supportive documentation regarding discrepancies must be submitted to the Agency as part of a complete loan file for all manually underwritten loans and GUS loans that receive a “Refer” or “Refer with Caution” underwriting recommendation as further outlined in Chapter 15 of this Handbook.  GUS loans that receive an “Accept” underwriting recommendation may retain the transcripts in the lender’s permanent loan case file.   

Additional Resource: https://www.rd.usda.gov/files/hb-1-3555.pdf#page=126