Income Guidelines           

Notes Receivable: A copy of the note must be presented to establish the amount and length of payment.  The borrower also must provide evidence that these payments have been received consistently for the last twelve months, which may include deposit slips, cancelled checks, or tax returns.  If the borrower is not the original payee on the note, the lender must also establish that the borrower is now a holder in due course and able to enforce the note. 

Interest and Dividends: Interest and dividend income may be used, provided that documentation (tax returns or account statements) supports a two-year history of receipt.  This income must be averaged over the two years.  Any funds derived from these sources and required for the cash investment must be subtracted before the projected interest or dividend income is calculated. 

Mortgage Credit Certificates:  If a government entity subsidizes the mortgage payments, either through direct payments or through tax rebates, these payments can be considered as acceptable income if verified in writing.  Either type of subsidy may be added to gross income or may be used to directly offset the mortgage payment before calculating the qualifying ratios.

Employer Differential Payments:  If the employer subsidizes the mortgage payments through direct payments, the amount of the payments is considered gross income; it may not be used to offset the mortgage payment directly, even if the employer pays the servicing lender directly. 

VA Benefits:  Direct compensation, such as for a service-related disability, is acceptable, subject to documentation from the VA.  Education benefits, used to offset education expenses, are not acceptable. 

Government Assistance Programs:  Income received from government assistance programs is acceptable, subject to documentation from the paying agency, provided the income is expected to continue at least three years.  If the income is not expected to be received for at least three years, such income may be considered as a compensating factor.  (Unemployment income must be documented for two years.  Reasonable assurance of its continuance is also required.  This requirement may apply to individuals employed on a seasonal basis, such as farm workers, resort employees, etc.) 

Rental Income:  Rent received for properties owned by the borrower is acceptable if the lender can document that the rental income is stable.  Examples of stability may include a current lease, an agreement to lease, or a rental history over the previous 24 months that is free of unexplained gaps greater than three months.  (Student, seasonal, or military renters, or property rehabilitation would provide such an explanation).  A separate schedule of real estate is not required for rental properties, provided all properties are shown on the Loan Application. 

If the borrower resides in one or more units of a multiple-unit property and charges rent to tenants of other units, that rent may be used for qualifying purposes.  However, projected rent of additional units only and not the owner-occupied unit(s) may be considered gross income only after deducting the appropriate vacancy and maintenance factor.  They may not be used as a direct offset to the mortgage payments.   

Income from roommates in a single-family property to be occupied as the borrower's primary residence is not acceptable.  Rental income from boarders is acceptable if the boarders are related by blood, marriage, or law.  The rental income may be considered effective income if shown on the borrower's tax returns.  Otherwise, the income only may be considered a compensating factor and must be documented adequately by the lender. 

The following is required to verify all rental income: 

1.       Schedule E of IRS Form 1040.  Depreciation may be added back to the net income or loss shown on Schedule E.  Positive rental income is considered gross income for qualifying purposes; negative rental income must be treated as a recurring liability.  The lender must be certain that the borrower still owns each property listed, by comparing the Schedule E with the real estate owned section of the residential loan application.  (If the borrower in the same general area owns six or more units, a map disclosing the locations must be submitted evidencing compliance with FHA's seven-unit limitation.  See paragraph 4-8 for additional information.) 

2.       Current Leases.  If a property was acquired since the last income tax filing and is not shown on Schedule E, a current signed lease or other rental agreement must be provided.  The gross rental amount must be reduced for vacancies and maintenance by 25 percent (or the percentage developed by the jurisdictional HOC), before subtracting PITI and any homeowners' association dues, etc., and applying the remainder to income (or recurring debts, if negative).

Principal Residence Being Vacated and Rented: Effective September 19, 2008 an underwriter may NOT consider any rental income from the primary residence being vacated and rented except under the circumstances listed below. 

       Exceptions:  Rental income on the primary residence being vacated reduced by the appropriate vacancy factor may be considered under the following circumstances:

• Relocations: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance.  A properly executed lease agreement of at least one year's duration after the loan is closed is required.  It is also recommended that proof of the security deposit and/or first months rent was paid to the homeowner.

• Sufficient Equity in Vacated Property:  The homebuyer has a loan to value ratio of 75% or less as determined by either a current appraisal of by comparing the unpaid principal balance to the original sales price of the property.

Automobile Allowances and Expense Account Payments:  Only the amount by which the borrower's automobile allowance or expense account payments exceed actual expenditures may be considered income.  The borrower must provide IRS Form 2106, Employee Business Expenses, for the previous two years to establish the amount of income that may be added to gross income.  The borrower also must provide verification from the employer that these payments will continue.  (If these calculations show a loss, that amount must be treated as a recurring debt.  If the borrower uses the standard per-mile rate in calculating automobile expenses, as opposed to the actual cost method, the portion that the IRS considers depreciation may be added back to income.)  Additionally, the borrower's monthly car payment must be treated as a recurring debt; it may not be offset by the car allowance. 

Trust Income:  Income from trusts may be used if guaranteed, constant payments will continue for at least the first three years of the mortgage term.  Documentation is required and includes a copy of the Trust Agreement, or other trustee's statement, confirming amount, frequency of distribution, and duration of payments.  Funds from the trust account also may be used for the required cash investment with adequate documentation. 

Non-Taxable Income:  If a particular source of regular income is not subject to federal taxes (e.g., certain types of disability and public assistance payments, military allowances), the amount of continuing tax savings attributable to the non-taxable income source may be added to the borrower's gross income.  The percentage of income that may be added may not exceed the appropriate tax rate for that income amount, and no additional allowances for dependents are acceptable.  The lender must document and support the adjustments (the amount the income is "grossed up") made for any non-taxable income source.  Child support income cannot be grossed up.  The lender should use the tax rate used to calculate last year's income tax for the borrower.  If the borrower is not required to file a federal income tax return, the tax rate to use is 25 percent.