5305.2: Specific requirements for other income types (10/31/18)

This section contains stable monthly income and documentation requirements for the following income types:

Notes receivable
Dividend and interest
Capital gains
Royalty payments
Trust income
Retirement income
Retirement account distributions as income
Survivor and dependent benefit income
Long-term disability income
Social Security Supplemental Security Income
Public assistance income
Homeownership Voucher Program
Foster-care income
Alimony, child support or separate maintenance payments
Housing or parsonage allowance
Income from a foreign source
Mortgage Credit Certificates
Tax-exempt income

Income typeStable monthly income requirements

Documentation requirements

Streamlined Accept and Standard Documentation Levels

Notes receivable

History of receipt: Receipt of payments for the most recent 12 months on a regular monthly basis

Continuance: Note must have a remaining term of at least three years

Calculation: Use the full scheduled payment amount documented on the noteCopy of the note evidencing the terms including, but not limited to, the scheduled amount and duration of payments, and proof of receipt of payments for the most recent 12 months

Dividend and interest

History of receipt: Most recent two-years

Continuance: Document that sufficient assets remain after closing to support continuance of the dividend and interest income, at the level used for qualifying, for at least the next three years

Calculation: 24-month average

Copy of either:

Complete federal individual income tax returns for the most recent two-year period

or

Year-end asset account statements for the most recent two years evidencing all dividend and interest income for each year for the income producing asset(s),

and

Evidence of sufficient assets to support the qualifying income

Capital gains

History of receipt: Most recent two-years of realized capital gains

Continuance: Document that sufficient assets remain after closing to support continuance of the capital gain income, at the level used for qualifying, for at least the next three years

Calculation: 24-month average

Copy of complete federal individual income tax returns for the most recent two-year period reflecting capital gain income, and,
Evidence of sufficient assets to support the qualifying income

Royalty payments

For Borrowers who have less than a two-year history:

History of receipt: Most recent one-year receipt of payments on a regular basis

Continuance: Royalty contract(s) and/or lease agreements must evidence eligibility for payment continuance for at least the next three years

Calculation: 12-month average

For Borrowers who have a history of two years or more:

History of Receipt: Most recent two-years receipt of payments on a regular basis

Continuance: Must be likely to continue for at least the next three years

Calculation: 24-month average
For Borrowers who have less than a two-year history:

Copy of complete federal individual income tax return for the most recent one-year period, and
Copy of royalty contract(s) or lease agreement(s) evidencing the terms including, but not limited to, the duration of payment eligibility

For Borrowers who have a history of two years or more:

Copy of complete federal individual income tax returns for the most recent two-year period

Trust income

History of receipt:

Most recent two-years if the income is based on historical fluctuating payments from a trust asset (e.g., dividends and interest)
A history of receipt is not required if the trust specifies pre-determined fixed payment amounts occurring at regular intervals for a duration of at least three years

Continuance: Document that sufficient assets remain after closing to support continuance of the trust income for at least the next three years

Calculation:

For fluctuating payments: 24-month average
For pre-determined fixed payments: Use the fixed payment amount documented in the trust agreement

For trust income based on historical fluctuating payments from a trust asset:

Copy of fully executed trust agreement outlining payment terms, and
Copy of complete federal individual income tax returns for the most recent two-year period, and
Evidence of sufficient assets to support the qualifying income (e.g., letter from trustee, bank statements)

or

For trust income based on a pre-determined fixed payment amount:

Copy of fully executed trust agreement specifying fixed payment amount occurring at set intervals (e.g., monthly, quarterly) and duration of payments, and
Document current receipt with a copy of a bank statement or other equivalent documentation, and
Evidence of sufficient assets to support the qualifying income (e.g., letter from trustee, bank statements)

Retirement income (e.g., Social Security, pension, annuity, other similar benefits; not including retirement account distributions as income)Existing and established retirement income:

Evidence of the type, source, pre-determined payment amount, payment frequency and current receipt must be obtained

History of receipt: A history of receipt is not required for the income to be considered stable
Continuance: Must be likely to continue for at least the next three years
Calculation: Use the documented fixed monthly payment amount

Newly established retirement income:

If the retirement income is newly established, verification of current receipt is not required; however, the finalized terms of the new income must be documented. The income must commence prior to or on the first Mortgage payment due date.

The terms that must be verified include, but are not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount that will commence prior to or on the first Mortgage payment due date.For existing and established sources of retirement income:

Document income type, source, payment frequency and pre-determined payment amount with a copy of a benefit verification letter, award letter, pay statement, 1099 or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 do not have to be met.
Document current receipt with a copy of a bank statement, pay statement, benefit verification letter, award letter or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 must be met.
For Social Security retirement benefits, the Seller must obtain either: (i) a copy of the Social Security Administration benefit verification letter or (ii) documentation evidencing current receipt, but is not required to obtain both.

For newly established sources of retirement income:

Document the finalized terms of the newly established income including, but not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, notice of award letter or other equivalent documentation from the payor that provides and establishes these terms. The income must commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. Verification of current receipt is not required.

Retirement account distributions as income (e.g., 401(k), IRA)Eligibility requirements:

Distributions from retirement accounts recognized by the Internal Revenue Service (IRS) (e.g., 401(k), IRA) that are not subject to penalty (e.g., early withdrawal penalty) may be considered stable monthly qualifying income. Evidence of the income source, type, distribution frequency, distribution amount(s), current receipt (as applicable) and history of receipt (as applicable), must be documented.

Required Minimum Distributions:

If distributions are being taken in accordance with certain IRS rules, such as the Required Minimum Distributions (RMD) rule (i.e., excise tax penalty applies if distributions are not taken), and evidence of current receipt of the required minimum distribution amount is obtained, history of receipt is not required for the income to be considered stable.

History and stability requirements and guidance:

Due to the multiple variables inherent with distributions from retirement accounts, including, but not limited to, fixed and fluctuating income amounts, the history of receipt necessary to justify a stable monthly qualifying income amount may vary. This may include a range of history from zero to 24 months, depending upon the individual circumstances. As with all income, the Seller must determine that the source and amount of the income are stable. Factors that the Seller must consider when determining that the income used to qualify the Borrower is stable, and when determining the history of receipt necessary to justify a stable monthly qualifying income amount include, but are not limited to the following:

Frequency and regularity of receipt of the distributions
Length of time the distributions have been taken and whether or not they establish a stable pattern of receipt over a given period of time. For example, consider whether or not the distributions are fixed amounts occurring with regular frequency or are fluctuating amounts occurring with or without regular frequency. For fixed amounts occurring with regular frequency, a lesser history of receipt may be needed in order to determine the amount and stability of the qualifying income than would be needed for fluctuating amounts. For fluctuating amounts, it may be necessary to obtain a longer history of receipt in order to determine the amount and stability of the qualifying income while taking into consideration whether or not the overall payments are similar when viewed year over year or with another similar measure, such as quarter over quarter.
Rules governing distributions (e.g., IRS rules governing exceptions to early withdrawal penalties and Required Minimum Distributions (RMD), employer retirement plan rules and designs governing scheduled distribution terms). Certain rules may provide support for the frequency and regularity of receipt as well as continued receipt, thereby enabling a lesser amount of history to justify a stable monthly qualifying income amount.

A written rationale explaining the analysis used to determine the qualifying income must be provided, regardless of the underwriting path.

Continuance:

Document that sufficient assets remain in the retirement account(s) after closing to support continuance of the retirement account distributions as income for at least the next three years.

Copy of most recent retirement account statement(s), documentation from financial institution holding retirement account that verifies regularly scheduled distribution arrangements, 1099(s) and/or other equivalent documentation showing income source, type, distribution frequency, distribution amounts and history of receipt (as applicable), and
Copy of bank statement(s) or other equivalent documentation evidencing current receipt (as applicable), and
Evidence of sufficient assets to support the qualifying income

If the retirement distributions are not scheduled monthly payments (e.g., annual, semi-annual, quarterly), the most recent distribution verified through a copy of the retirement account statement, 1099 and/or other equivalent documentation, as applicable, is sufficient in lieu of current receipt; however, verification of receipt of multiple distributions may be necessary to determine frequency of distributions, history of receipt and amount of stable monthly qualifying income.

Survivor and dependent benefit income (e.g., Social Security Survivor benefits, Survivors' Department of Veterans Affairs (VA) benefits, other similar benefits)Existing and established survivor and dependent benefit income:

Evidence of the type, source, pre-determined payment amount, payment frequency and current receipt must be obtained

History of receipt: A history of receipt is not required for the income to be considered stable
Continuance: Must be likely to continue for at least the next three years
Calculation: Use the documented fixed monthly payment amount

Newly established survivor and dependent benefit income:

Verification of current receipt is not required; however, the finalized terms of the new income must be documented. The income must commence prior to or on the first Mortgage payment due date.

The terms that must be verified include, but are not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount that will commence prior to or on the first Mortgage payment due date.Existing and established sources of survivor and/or dependent benefit income:

Document income type, source, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, award letter, 1099 or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 do not have to be met.
Document current receipt with a copy of the bank statement, benefit verification letter, notice of award letter or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 must be met.

or

Newly established sources of survivor and/or dependent benefit income:

Document the finalized terms of the newly established income including, but not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, notice of award letter or other equivalent documentation from the payor that provides and establishes these terms. The income must commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. Verification of current receipt is not required.

Long-term disability income (e.g., Social Security disability benefits, VA disability compensation, worker's compensation, private disability insurance)Existing and established long-term disability income:

Evidence of the source, insurance and/or benefit type, pre-determined payment amount, payment frequency and current receipt must be obtained

History of receipt: A history of receipt is not required for the income to be considered stable.
Continuance: Long-term disability income may be considered to have a reasonable expectation of continuance without obtaining any additional documentation unless there is a pre-determined insurance and/or benefit expiration date that is less than three years (e.g., stated termination of a private disability insurance policy).Pending or current re-evaluation of medical eligibility for insurance and/or benefit payments is not considered an indication that the insurance and/or benefit payment will not continue.
Calculation: Use the documented fixed monthly payment amount

Newly established long-term disability income:

Verification of current receipt is not required; however, the finalized terms of the new income must be documented. The income must commence prior to or on the first Mortgage payment due date.

The terms that must be verified include, but are not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount that will commence prior to or on the first Mortgage payment due date.

The documentation must be dated no more than 120 days prior to the Note Date.Existing and established sources of long-term disability income:

Document income type, source, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, award letter, pay statement, 1099, W-2 or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 do not have to be met.
Document current receipt with a copy of the bank statement, pay statement, benefit verification letter, notice of award letter or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 must be met.
For Social Security disability benefits, the Seller must obtain either: (i) a copy of the Social Security Administration benefit verification letter or (ii) documentation evidencing current receipt, but is not required to obtain both.

Newly established sources of long-term disability income:

Document the finalized terms of the newly established income including, but not limited to, the source, type, effective date of income commencement, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, notice of award letter or other equivalent documentation from the payor that provides and establishes these terms.
The income must commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. Verification of current receipt is not required.

If the disability policy has a pre-determined expiration date (e.g., certain disability policies provided by employers, private insurers), obtain a copy of the certificate of coverage, or other equivalent documentation evidencing the policy term.Social Security Supplemental Security Income (SSI)Existing and established SSI benefits:

Evidence of the source, benefit type, pre-determined payment amount, payment frequency and current receipt must be obtained

History of receipt: A history of receipt is not required for the income to be considered stable.
Continuance: SSI may be considered to have a reasonable expectation of continuance unless there is evidence that the benefits will not continue.Pending or current re-evaluation of medical eligibility for benefit payments is not considered an indication that the insurance and/or benefit payment will not continue.
Calculation: Use the documented SSI benefit amount

Newly established SSI benefits:

Verification of current receipt is not required; however, the finalized terms of the new income must be documented. The income must commence prior to or on the first Mortgage payment due date.

The terms that must be verified include, but are not limited to, the source, benefit type, effective date of income commencement, payment frequency and pre-determined payment amount that will commence prior to or on the first Mortgage payment due date.Existing and established SSI benefits:

Document source, benefit type, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, award letter, 1099 or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 do not have to be met.
Document current receipt with a copy of the bank statement, benefit verification letter, notice of award letter or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 must be met.

or

Newly established SSI benefits:

Document the finalized terms of the newly established income including, but not limited to, the source, benefit type, effective date of income commencement, payment frequency and pre-determined payment amount with a copy of the benefit verification letter, notice of award letter or other equivalent documentation from the payor that provides and establishes these terms.
The income must commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. Verification of current receipt is not required.

Public assistance income (e.g., Temporary Assistance for Needy Families (TANF))Existing and established public assistance income: Evidence of the source, benefit type, payment frequency, amount, duration of benefit eligibility and current receipt must be obtained

History of receipt: A history of receipt is not required for the income to be considered stable
Continuance: All public assistance income must be likely to continue for the next three years
Calculation: Use the documented public assistance benefit amount

Newly established public assistance income:

Verification of current receipt is not required; however, the finalized terms of the new income must be documented. The income must commence prior to or on the first Mortgage payment due date.

The terms that must be verified include, but are not limited to, the source, benefit type, duration of benefit eligibility, effective date of income commencement, payment frequency and pre-determined payment amount that will commence prior to or on the first Mortgage payment due date.Existing and established sources of public assistance benefits:

Document income source, benefit type, payment frequency, pre-determined payment amount and duration of benefit eligibility with a copy of the benefit verification letter or other equivalent documentation from applicable agency. Age of documentation requirements as described in Section 5102.4 do not have to be met.
Document current receipt with a copy of the bank statement, benefit verification letter from applicable agency or other equivalent documentation. Age of documentation requirements as described in Section 5102.4 must be met.

or

Newly established sources of public assistance benefits:

Document the finalized terms of the newly established income including, but not limited to, the source, benefit type, duration of benefit eligibility, effective date of income commencement, payment frequency and pre-determined payment amount with a copy of the benefit verification letter or other equivalent documentation from the applicable agency that provides and establishes these terms.
The income must commence prior to or on the first Mortgage payment due date. The documentation must be dated no more than 120 days prior to the Note Date. Verification of current receipt is not required.

Homeownership Voucher Program payments (formerly referred to as Section 8 homeownership assistance payments)History of receipt: A history of receipt is not required for the income to be considered stable

Continuance: Homeownership Voucher Program assistance term limit must have a remaining term of at least three years

Calculation: Use the fixed monthly payment amount documented by the public housing agency that issued the voucher. The payments may not be used to offset the monthly housing payment amount used for qualification.Copy of documentation from the public housing agency that issued the homeownership voucher verifying the terms including, but not limited to, the source, benefit type, payment frequency, payment amount and duration of the term limit for assistance

Foster-care income received from a state- or county- sponsored organization

History of receipt: Most recent two-years

Continuance: Must be likely to continue for at least the next three years

Calculation: 24-month average

Documentation to evidence receipt of foster-care income for the most recent two-year period

Alimony, child support or separate maintenance payments

History of receipt: Most recent six months

If the payor has been obligated to make payments for less than six months, if the payments are not for the full amount or are not received on a consistent basis, the income must not be considered for qualifying.

Continuance: Document and verify the payor is obligated to make payment to the Borrower for at least the next three years

Calculation: Use the documented fixed monthly payment amount

Documentation to evidence receipt of the alimony, child support and/or separate maintenance payment amount for the most recent six months, and
Copy of the signed court order, legally binding separation agreement and/or final divorce decree verifying the payor's obligation for the previous six months, including the amount and the duration of the obligation, and
For child support income, proof of the ages of the children for which child support is received

Housing or parsonage allowance (for military housing entitlements refer to Section 5303.3(d))

History of receipt: Most recent 12 months

Continuance: Must be likely to continue for at least the next three years

Calculation: Use the documented monthly payment amount

The housing allowance may not be used to offset the monthly housing payment.

Written verification of employment (VOE), a letter from the employer or paystubs documenting the amount of the housing or parsonage allowance and the terms under which it is paid, and
Documented evidence of the most recent 12 months' receipt of the housing or parsonage allowance

Income from a foreign source (i.e., non-employment/non-self-employment income)Requirements: The income must be reported on the Borrower's most recent U.S. federal individual income tax return

Refer to the income type(s) listed in this chapter for the requirements applicable to the income type received from the foreign source (e.g., history of receipt, continuance, calculation, documentation).

Copy of the Borrower's most recent complete signed U.S. federal individual income tax return, and
Documentation for the applicable income type in accordance with the requirements of this chapter

Mortgage Credit Certificates (MCCs)History of receipt: A history of receipt is not required

Calculation:

The amount used as qualifying income must be calculated as follows: (Mortgage amount) x (Note Rate) x (Mortgage Credit Certificate rate %) divided by 12
The amount used as qualifying income cannot exceed the maximum Mortgage interest credit permitted by the IRS

Copy of the MCCTax-exempt income

History of receipt: A history of receipt is not required

Continuance: Must be likely to continue to remain tax exempt

Calculation: To determine the amount to adjust (i.e., "gross-up") the Borrower's income, use:

25% of the tax exempt portion of the income or
The current federal and state income tax withholding tables

Copy of complete federal individual income tax return for the most recent one-year period or other documentation evidencing that the income, or a portion of the income, is tax exempt