Hello Mortgage Seekers!
Welcome to the third and final installment of our income discussion. Today, we will be looking at the other buckets of self employment income we haven’t yet explored. There are several in this category. In an attempt to streamline the post, we will group them loosely to have a complete conversation:
- Disability Income
- Social security income
- VA disability
- Private disability
- Retirement Income
- Social Secrurity
- Investment Income
- Alimony/Child Support Income
- Military Income
- Mortgage Credit Certificates
- Other Government Assistance
- Section 8 Homeownership Vouchers
Before someone says it, rental income is the other big bucket of income that can be used towards your mortgage. That however, is a beast unto itself. We will do a separate post on using rental income for qualifying.
Disability income is income derived from either Social Security Disability, Veterans Administration (VA) Disability or Private Disability. All can be used as sources of effective income for a home mortgage. The requirement from a lending perspective is to document continued receipt of the benefit for the first three years of the mortgage note. If the benefit is due to expire within the first three years from the date of mortgage application, the income can not be used as effective income. That designation is important because the date of mortgage application is always earlier than the close date or the date of the first payment. Something to be aware of, and pay attention to if you or the borrower you’re working for has a disability benefit that will expire.
Each of the disability income types have pretty much the same burden of proof. People who receive disability benefits all have some form of an awards letter. The loan office is going to request the latest version of that document in addition to one of the following:
- Federal Tax Return
- Most recent bank statement
- Proof of income letter or budget letter (for Social Security Disability)
There are multiple ways to use disability income as effective income for a mortgage. It can be a supplement to full time income, or as the only source of income for a home purchase.
Ah the beauty of having an income in retirement that you don’t have to actively work for. Isn’t that everyones goal? For the lucky few who are experiencing this euphoria now, they can use their retirement income as effective income towards their home mortgage. How a loan office or loan officer view the retirement income depends on the source.
Social Security Income (SSI) that is not disability income may be counted as effective income. The loan office/loan officer must document the borrowers receipt of the SSI income and prove it is reasonably likely to continue for the next three years. This three years is counted from either application date (Conventional loan ) or the date the case number is issued (FHA loan). Again, dates you should be aware of if this is your situation.
Pension income refers to income received from a previous employer. The loan office/loan officer must document periodic receipt of pension payments and that the payments are likely to continue for three years. Anyone else see a pattern here? Acceptable forms of proof include letter from employer outlining the details of the pension, federal tax returns evidencing past pension income and/or the most recent bank statement showing the pension deposits.
IRA/401K income is income received from these investment vehicles. Here, effective income is defined as anything that is reasonably expected to continue for the next three years. Tax returns loan or the most recent bank statement evidencing receipt of income is deemed acceptable sources.
Investment income refers to dividend and interest income received from assets such aa certificates of deposits, mutual funds, stocks, bonds, money markets and savings and checking accounts. Acceptable documentation is ta returns from the previous two years and the most recent account statement. The amount of investment income that can be used is the lesser of the average income over the last one year or the last two years. Cash required to close must be subtracted from any calculation of effective income. Capital gains, trust accounts and annuities are all forms of investment income that can be used as effective income.
Alimony/Child Support Income:
Alimony and child support income can be touchy subjects. I’ve actually had an ex-spouse voluntarily offer child support to his ex-wife so she had more effective income to qualify for a mortgage. Makes you wonder why he’s an ex! That seemed very generous to me, and I think most would agree, not the norm. If these types of income apply to a borrower we have the normal refrain of “we have to prove three years of receipt” in order to use the income. If you’ve skipped to this paragraph and not read all of the above. What I mean is for the child support or alimony income to be used towards the mortgage, you have to prove you will receive it for three years from loan application.
Additionally, the loan office/loan officer must also prove the income has been received for 12 months in arrears. There are specific situations where we can use six months proof of payment, but the standard is 12. To document these income streams, the borrower will be asked to provide:
- Fully executed final divorce decree, separation agreement or other legal document
- 12 months of cancelled checks or proof of deposits into the borrowers account
- Proof of age of the minor child (for child support)
Here the amount we can use gets a big convoluted. We have to prove you’ve received the benefit for the last six or 12 months, depending on the situation. However, we use the average of the last three months of payments as the dollar amount for effective income. IF, the payments have not been consistent, we have to use the average of the last two years of payments towards effective income. This is a complex one, contact me if this is your situation and we can discuss how we apply your income to your home purchase.
Active military, Reserve or National Guard service pay can be used as effective income for a home purchase. Fairly straight forward. The only slightly quirky thing is the borrower would have to verify their intent to continue in military service at least 12 months after the note date.
Mortgage Credit Certificates (MCC):
This is my most favorite new thing. It’s only new to me because the MCC just recently became available in DC. I have a more exhaustive post on this topic HERE. The one piece that is truly awesome, is you can use income garnered from the MCC towards effective income! When a loan office/loan officer is calculating the borrowers debt to income ratio, they will treat the maximum possible MCC income as an addition to the borrowers income, not as a reduction to the mortgage payment. The calculation is as follows:
[(Mortgage Loan Amount) x (Note/Interest Rate) x (MCC%)] / 12 = Amount Added To Monthly Income
In DC the MCC percentage is 25%. For reference, in MD, the MCC is 20% up to a max of $2,000. For example, if a borrower is buying a $200,000 house and their interest rate (note rate) is 4.675% their calculation would look like this:
[($200,000) x (4.675%) x (25%)] / 12 = $195
Talk about a benefit! Just because I qualify, I get more income!
Section 8 Vouchers & Public Assistance:
Section 8 refers to housing vouchers borrowers may receive from a federal or state government entity. Only certain types of vouchers can be used towards a home purchase. Three years of continued benefit receipt is required in order to use the income as effective income. Public assistance refers to any other income received from a government entity. This includes but is not limited to temporary assistance for needy families (TANF), foster care income and welfare or the like.
In my experience, there is quite an involved process when seeking to use Section 8 vouchers. DC requires a lengthy approval and training process, and it can be brutal. However, if this situation applies to a borrower, it’s a valid source of income.
As always, I am happy to discuss your situation and see how we might be able to get you, or someone you know approved for a new home purchase.