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FAQs updated December 17, 2020

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Asset Assessment > Verification of Non-Depository

  • Q1.
    How is a rent back credit treated for qualifying purposes?

    A rent back credit may appear on the Closing Disclosure as a credit to the borrower.  In all cases, the lender must underwrite the loan without any consideration of the rent back credit and must document the borrower has sufficient funds for the transaction from eligible sources.

  • Q2.
    If the borrower is also the realtor, can they use commission earned on the sale for funds to close?

    A borrower, who is also the realtor on the subject property, may use commission earned towards the funds to close requirement, as long as

    • the lender verifies that the borrower has sufficient funds for the transaction without the commission, and
    • funds for closing are validated prior to closing. 

Borrower Eligibility > Non-U.S. Citizen Borrower Eligibility

  • Q1.
    What are the eligibility requirements for non-U.S. citizen borrowers?

    Non-Citizen Borrower Eligibility Requirements

    We have a longstanding policy on eligibility for non-U.S. citizen borrowers. Fannie Mae purchases and securitizes mortgages to non-citizens who are lawful permanent or non-permanent residents of the United States under the same terms available to U.S. citizens. 

    Clarity & Certainty

    • In response to customer feedback, we’re providing examples of acceptable documentation to support that a borrower is “legally present.”
    • For loans that meet our documentation and eligibility requirements, we will not seek a loan repurchase solely based on a change in the borrower’s immigration status after closing.

    Eligibility Guidelines

    We’re not changing our existing policies, but providing additional guidance to help lenders determine eligibility for non-U.S. citizen borrowers. Under the Selling Guide, Fannie Mae considers a borrower legally present in the United States if:

    • he/she has a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN); and
    • he/she has current, verified status, which may be documented by a valid employment authorization document (EAD), or other documentation showing immigration status is current (e.g., Green Card, work visa, etc.).

    A borrower who is legally present under the Selling Guide must meet all other applicable underwriting and eligibility requirements for the loan to be eligible for sale to Fannie Mae. This includes the continuity of income requirements that apply to all borrowers:

    • Documentation of income continuity is not required for most employment-related income types (e.g., base, bonus, overtime, commission).
    • If a borrower is reliant on income for which documentation of continuity is required, the mere fact that a borrower has current, verified status does not impact the continuity of income analysis. For example, if a borrower can provide documentation of 3-year income continuity when required, the fact that their status is renewed only every 2 years is not a factor — the borrower is legally present and has met the continuity of income requirements.

    Lenders retain discretion as individual borrower situations differ.

    Lenders can continue to decide what type of documentation is appropriate and what can be retained as part of the loan file to show that a borrower is legally present.

    As with all Fannie Mae policies, subsequent changes to the law and its application may cause us to reevaluate our policy on this matter prospectively.

    For additional information including borrower scenarios, see the links below:

    Non-Citizen Borrower Eligibility Fact Sheet

    B2-2-01, General Borrower Eligibility Requirements
    B2-2-02, Non–U.S. Citizen Borrower Eligibility Requirements
    B3-3.1-01, General Income Information

Income Assessment > Employment Offers/ Contracts

  • Q1.
    Are contingencies allowed when qualifying a borrower using an employment offer or contract?

    Employment Offers or Contracts

    The employment offer or contract must be non-contingent.

    Note: If conditions of employment exist, the lender must confirm prior to closing that all conditions of employment are satisfied either by verbal verification or written documentation. This confirmation must be noted in the mortgage loan file.

    For additional information, see B3-3.1-09, Other Sources of Income.

  • Q2.
    For employment offers and contracts, are there alternative documentation options if a paystub cannot be obtained?

    In lieu of a paystub, the lender can obtain a fully completed Verification of Employment (VOE) with year-to-date earnings to verify the income used to qualify.

    For additional information, see B3-3.1-09, Other Sources of Income.

  • Q3.
    What is required when employment is scheduled to begin after the loan closes?

    Employment Offers or Contracts

    If the borrower is scheduled to begin employment under the terms of an employment offer or contract, the lender may deliver the loan in accordance with one of the options outlined below.

    Option 1 -- Paystub Obtained Before Loan Delivery
      The lender must obtain an executed copy of the borrower's offer or contract for future employment and anticipated income.
      Prior to delivering the loan, the lender must obtain a paystub from the borrower that includes sufficient information to support the income used to qualify the borrower based on the offer or contract. The paystub must be retained in the mortgage loan file.
    Option 2 -- Paystub Not Obtained Before Loan Delivery
     

    This option is limited to loans that meet the following criteria:

    • purchase transaction,
    • principal residence,
    • one-unit property,
    • the borrower is not employed by a family member or by an interested party to the transaction, and
    • the borrower is qualified using only fixed based income.
     

    The lender must obtain and review the borrower’s offer or contract for future employment. The employment offer or contract must

    • clearly identify the employer and the borrower, be signed by the employer, and be accepted and signed by the borrower;
    • clearly identify the terms of employment, including position, type and rate of pay, and start date; and
    • be non-contingent. Note: If conditions of employment exist, the lender must confirm prior to closing that all conditions of employment are satisfied either by verbal verification or written documentation. This confirmation must be noted in the mortgage loan file.

    Also note that for a union member who works in an occupation that results in a series of short-term job assignments (such as a skilled construction worker, longshoreman, or stagehand), the union may provide the executed employment offer or contract for future employment.

      The borrower’s start date must be no earlier than 30 days prior to the note date or no later than 90 days after the note date.

    Prior to delivery, the lender must obtain the following documentation depending on the borrower’s employment start date:

    If the borrower’s start date is... Documentation Required
    The note date or no more than 30 days prior to the note date
    • Employment offer or contract; and
    • Verbal verification of employment that confirms active employment status
    No more than 90 days after the note date Employment offer or contract
     

    The lender must document, in addition to the amount of reserves required by DU or for the transaction, one of the following:

    • Financial reserves sufficient to cover principal, interest, taxes, insurance, and association dues (PITIA) for the subject property for six months; or
    • Financial resources sufficient to cover the monthly liabilities included in the debt-to-income ratio, including the PITIA for the subject property, for the number of months between the note date and the employment start date, plus one. For calculation purposes, consider any portion of a month as a full month.

      Financial resources may include:

      • financial reserves, and

      • current income.

    Current income refers to net income that is currently being received by the borrower (or coborrower), may or may not be used for qualifying, and may or may not continue after the borrower starts employment under the offer or contract. For this purpose, the lender may use the amount of income the borrower is expected to receive between the note date and the employment start date. If the current income is not being used for qualifying purposes, it can be documented by the lender using income documentation, such as a paystub, but a verification of employment is not required.

      The lender must deliver the loan with Special Feature Code 707.

    Note:  DU will issue a verification message related to employment offers and contracts if the borrower’s current employment start date is blank or after the date the loan casefile was created.

     For additional information, see B3-3.1-09, Other Sources of Income.

Income Assessment > Other Sources

  • Q1.
    Can an adjusted gross income be used for Social Security benefits?

    Using Nontaxable Income to Adjust the Borrower’s Gross Income

    The lender should give special consideration to regular sources of income that may be nontaxable, such as child support payments, Social Security benefits, workers’ compensation benefits, certain types of public assistance payments, and food stamps. 

    The lender must verify that the particular source of income is nontaxable. Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the nontaxable status of the income.

    If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the lender may develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25% of the nontaxable income to the borrower’s income.

    If the actual amount of federal and state taxes that would generally be paid by a wage earner in a similar tax bracket is more than 25% of the borrower’s nontaxable income, the lender may use that amount to develop the adjusted gross income, which should be used in calculating the borrower’s qualifying ratio.

    For additional information, see B3-3.1-01, General Income Information.

  • Q2.
    If a borrower cannot locate their Social Security award letter, can other documentation be used to verify income for retirement or disability?

    Yes. Borrowers may provide their most recent Social Security statement or SSA-1099 evidencing the amount of the benefit. These documents can be used in lieu of the Social Security Award letter to verify income for retirement or disability (drawn from the borrower’s own account or work record). Borrowers can obtain both of these documents using their online my Social Security account (ssa.gov/myaccount).

    Other documentation, such as the borrower's tax return, may also be acceptable in certain cases provided all of the requirements in Selling Guide B3-3.1-09, Other Sources of Income are met.

  • Q3.
    What are the requirements for foster care income?

    Foster-Care Income

    Income received from a state- or county-sponsored organization for providing temporary care for one or more children may be considered acceptable stable income if the following requirements are met.

    Verification of Foster-Care Income
      Verify the foster-care income with letters of verification from the organizations providing the income.
     

    Document that the borrower has a two-year history of providing foster-care services. If the borrower has not been receiving this type of income for two full years, the income may still be counted as stable income if

    • the borrower has at least a 12-month history of providing foster-care services, and

    • the income does not represent more than 30% of the total gross income that is used to qualify for the mortgage loan.

    For additional information, see B3-3.1-09, Other Sources of Income.

  • Q4.
    What are the requirements for long-term disability income?

    Disability Income — Long-Term

    The below provides the verification requirements for long-term disability income. It does not apply to disability income that is received from the Social Security Administration.

    Obtain a copy of the borrower’s disability policy or benefits statement from the benefits payer (insurance company, employer, or other qualified disinterested party) to determine

    • the borrower’s current eligibility for the disability benefits,
    • the amount and frequency of the disability payments, and
    • if there is a contractually established termination or modification date.

    Generally, long-term disability will not have a defined expiration date and must be expected to continue. The requirement for re-evaluation of benefits is not considered a defined expiration date.

    If a borrower is currently receiving short-term disability payments that will decrease to a lesser amount within the next three years because they are being converted to long-term benefits, the amount of the long-term benefits must be used as income to qualify the borrower. For additional information on short-term disability, see Temporary Leave Income in B3-3.1-09, Other Sources of Income.

  • Q5.
    What are the requirements for using Social Security Income?

    Social Security Income

    The following table provides verification requirements for Social Security income.

    Verification of Social Security Income
      Social Security income for retirement or long-term disability that the borrower is drawing from his or her own account/work record will not have a defined expiration date and must be expected to continue.

    However, if Social Security benefits are being paid as a benefit for a family member of the benefit owner, that income may be used in qualifying if the lender obtains documentation that confirms the remaining term is at least three years from the date of the mortgage application.

      Document regular receipt of payments, as verified by the following, depending on the type of benefit and the relationship of the beneficiary (self or other) as shown in the table below.
    Documentation Requirements
    Type of Social Security benefit Borrower is drawing Social Security benefits from own account/work record 1 Borrower is drawing Social Security benefits from another person’s account/work record 2
    Retirement
    • Social Security Administrator’s (SSA) Award letter, or

    • Proof of current receipt

    • SSA Award letter,

    • Proof of current receipt, AND

    • Three-year continuance (e.g., verification of beneficiary’s age)

    Disability
    Survivor Benefits NA
    Supplement Security Income (SSI)
    • SSA Award letter, and

    • Proof of current receipt

    NA

    1 An SSA Award letter may be used to document the income if the borrower is receiving Social Security payments or if the borrower will begin receiving payments on or before the first payment date of the subject mortgage as confirmed by a recently issued award letter.

    2 Examples of how a borrower might draw Social Security benefits from another person’s account/work record and use the income for qualifying: A borrower may be eligible for benefits from a spouse, ex-spouse, or dependent parents (the benefit is paid to the borrower on behalf of the spouse, etc.); or A borrower may use Social Security income received by a dependent (a minor or disabled dependent).

    If a borrower’s Social Security income is validated by the DU validation service, DU will issue a message indicating the required documentation. This documentation may differ from the requirements described above. See B3-2-02, DU Validation Service.

  • Q6.
    What are the requirements for alimony, child support, or separate maintenance income?

    Alimony, Child Support, or Separate Maintenance

    The following table provides verification requirements for alimony, child support, or separate maintenance.

    Verification of Income From Alimony, Child Support, or Separate Maintenance
      Document that alimony, child support or separate maintenance will continue to be paid for at least three years after the date of the mortgage application, as verified by one of the following:
    • A copy of a divorce decree or separation agreement (if the divorce is not final) that indicates the monthly payment and states the amount of the award and the period of time over which it will be received.

      Note: If a borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the lender should not consider any proposed or voluntary payments as income.

    • Any other type of written legal agreement or court decree describing the payment terms.

    • Documentation that verifies any applicable state law that mandates alimony, child support, or separate maintenance payments, which must specify the conditions under which the payments must be made.

     

    Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid.

      Document no less than six months of the borrower’s most recent regular receipt of the full payment.
      Review the payment history to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer. Income received for less than six months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.

    Note: The lender may include alimony, child support, or separate maintenance as income only if the borrower discloses it on the Form 1003 and requests that its be considered in qualifying for the loan.

    For additional information, see B3-3.1-09, Other Sources of Income.

  • Q7.
    When can adoption assistance be used as income?

    Adoption assistance may be considered an acceptable source of qualifying income provided that

    • the borrower’s receipt of the income is documented with letters or exhibits from the paying agency that state the amount, frequency, and duration of benefit payment; and
    • a minimum of three years continuance from the date of the mortgage application is verified.

    For additional information, see Public Assistance in B3-3.1-09, Other Sources of Income.

    Adoption assistance that is received in the form of a lump sum payment (from an employer for example) cannot be included as qualifying income, but is allowable as an asset if deposited into an account and sourced.

Income Assessment > Rental Income

  • Q1.
    Are there any restrictions on using rental income if renting to a family member?

    Fannie Mae does not have restrictions on using rental income on a property that is being rented to a family member.  For additional information, see B3-3.1-08, Rental Income.

  • Q2.
    Can a borrower use rental income that is generated from short-term rentals as qualifying income?

    Rental income derived from the subject property is acceptable on a two- to four-unit principal residence in which the borrower occupies one of the units, or a one- to four-unit investment property.  If the transaction is a purchase money transaction, information on Forms 1007/1025 may be used to derive rental income (including short-term rental income) for qualifying purposes.  If the transaction is a refinance, rental income may be used when reported on the borrower’s individual tax returns (Schedule E).  The alternative to the tax returns is a lease agreement; however, since short-term rental occupants usually execute a terms and conditions agreement (not a lease agreement), this alternative would not meet our requirements and therefore the income would not be eligible.

    Rental income derived from other property (not the subject property) must be documented either by a lease agreement or the most recent years tax returns.  A lease agreement is usually not an option in the case of short-term rentals since the occupants do not execute a lease agreement.  However, if the borrower is reporting rental income (including short-term rental income) on the most recent year's tax returns, then rental income may be considered as qualifying income. 

    See B3-3.1-08, Rental Income for complete documentation requirements and B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements, for information regarding rental income on a one-unit principal residence.
     
     

  • Q3.
    How do I calculate rental income?

    Calculating Monthly Qualifying Rental Income (or Loss) 

    To determine the amount of rental income from the subject property that can be used for qualifying purposes when the borrower is purchasing or refinancing a two- to four-unit principal residence or one- to four-unit investment property, the lender must consider the following:

    If the borrower... Then for qualifying purposes...
    • currently owns a principal residence (or has a current housing expense), and
    • has at least a one-year history of receiving rental income or documented property management experience
    there is no restriction on the amount of rental income that can be used.
    • currently owns a principal residence (or has a current housing expense), and
    • has less than one-year history of receiving rental income or documented property management experience
    • for a principal residence, rental income in an amount not exceeding the PITIA of the subject property can be added to the borrower’s gross income, or
    • for an investment property, rental income can only be used to offset the PITIA of the subject property.
    • does not own a principal residence, and
    • does not have a current housing expense
    rental income from the subject property cannot be used.

    The lender must establish a history of property management experience by obtaining one of the following:

    • The borrower’s most recent signed federal income tax return, including Schedules 1 and E. Schedule E should reflect rental income received for any property and Fair Rental Days of 365;
    • If the property has been owned for at least one year, but there are less than 365 Fair Rental Days on Schedule E, a current signed lease agreement may be used to supplement the federal income tax return; or
    • A current signed lease may be used to supplement a federal income tax return if the property was out of service for any time period in the prior year. Schedule E must support this by reflecting a reduced number of days in use and related repair costs. (Form 1007)* or (Form 1025)* must support the income reflected on the lease.

    The lender must document the borrower has at least a one-year history of receiving rental income in accordance with Documenting Rental Income From Property Other Than the Subject Property.

    Note:This policy does not apply to HomeReady loans with rental income from an accessory unit.

    Method for Calculating the Income

    The method for calculating rental income (or loss) for qualifying purposes is dependent upon the documentation that is being used.

    Federal Income Tax Returns, Schedule E. When Schedule E is used to calculate qualifying rental income, the lender must add back any listed depreciation, interest, homeowners’ association dues, taxes, or insurance expenses to the borrower’s cash flow. Non-recurring property expenses may be added back, if documented accordingly.

    If the property was in service

    • for the entire tax year, the rental income must be averaged over 12 months; or
    • for less than the full year, the rental income must be averaged over the number of months that the borrower used the property as a rental unit.

    See Treatment of the Income (or Loss) below for further instructions.

    Lease Agreements or Form 1007 or Form 1025: When current lease agreements or market rents reported on Form 1007 or Form 1025 are used, the lender must calculate the rental income by multiplying the gross monthly rent(s) by 75%. (This is referred to as “Monthly Market Rent” on the Form 1007.) The remaining 25% of the gross rent will be absorbed by vacancy losses and ongoing maintenance expenses.

    See Treatment of the Income (or Loss) below for further instructions.

    Treatment of the Income (or Loss)

    The amount of monthly qualifying rental income (or loss) that is considered as part of the borrower's total monthly income (or loss) — and its treatment in the calculation of the borrower's total debt-to-income ratio — varies depending on whether the borrower occupies the rental property as his or her principal residence.

    If the rental income relates to the borrower's principal residence:

    • The monthly qualifying rental income (as defined above) must be added to the borrower’s total monthly income. (The income is not netted against the PITIA of the property.)

    • The full amount of the mortgage payment (PITIA) must be included in the borrower’s total monthly obligations when calculating the debt-to-income ratio.

    If the rental income (or loss) relates to a property other than the borrower's principal residence:

    • If the monthly qualifying rental income (as defined above) minus the full PITIA is positive, it must be added to the borrower’s total monthly income.

    • If the monthly qualifying rental income minus PITIA is negative, the monthly net rental loss must be added to the borrower’s total monthly obligations.

    • The full PITIA for the rental property is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.

    • The full monthly payment for the borrower's principal residence (full PITIA or monthly rent) must be counted as a monthly obligation.

    For additional information, see B3-3.1-08, Rental Income.

    *For a complete list of forms used in fulfilling requirements contained in the Selling and Servicing Guides, see the Guide Forms page.

  • Q4.
    How do I document rental income from property other than the subject property?

    Documenting Rental Income from Property Other Than the Subject Property 

    When the borrower owns property – other than the subject property – that is rented, the lender must document the monthly gross (and net) rental income with the borrower’s most recent signed federal income tax return that includes Schedule 1 and Schedule E. Copies of the current lease agreement(s) may be substituted if the borrower can document a qualifying exception. See Reconciling Partial or No Rental History on Tax Returns below.

    Reconciling Partial or No Rental History on Tax Returns

    In order for the lender to determine qualifying rental income, the lender must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. In some situations, the lender’s analysis may determine that using alternative rental income calculations or using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties. This policy may be applied to refinances of a subject rental property or to other rental properties owned by the borrower.

    If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using

    • Schedule E income and expenses, and annualizing the income (or loss) calculation; or
    • fully executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation.
    If ... Then ...
    the property was acquired during or subsequent to the most recent tax filing year,

    the lender must confirm the purchase date using the settlement statement or other documentation.

    • If acquired during the year, Schedule E (Fair Rental Days) must confirm a partial year rental income and expenses (depending on when the unit was in service as a rental).
    • If acquired after the last tax filing year, Schedule E will not reflect rental income or expenses for this property.
    the rental property was out of service for an extended period,
    • Schedule E will reflect the costs for renovation or rehabilitation as repair expenses. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service.
    • Schedule E (Fair Rental Days) will confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year.
    the lender determines that some other situation warrants an exception to use a lease agreement, the lender must provide an explanation and justification in the loan file.

    If the borrower is converting a principal residence to an investment property, see B3-6-06, Qualifying Impact of Other Real Estate Owned, for guidance in using that rental income to qualify the borrower.

    For additional information, see B3-3.1-08, Rental Income.

  • Q5.
    How do I document rental income from the subject property?

    Documenting Rental Income from Subject Property

    The lender must obtain documentation that is used to calculate the monthly rental income for qualifying purposes. The documentation may vary depending on whether the borrower has a history of renting the property, and whether the prior year tax return includes the income.

    Does the Borrower Have a History of Receiving Rental Income From the Subject Property? Transaction Type Documentation Requirements
    Yes Refinance

    Form 1007 or Form 1025, as applicable, and either

    • the borrower’s most recent year of signed federal income tax returns, including Schedule 1 and Schedule E, or

    • copies of the current lease agreement(s) if the borrower can document a qualifying exception (see Partial or No Rental History on Tax Returns).

    No Purchase

    Form 1007 or Form 1025, as applicable, and

    • copies of the current lease agreement(s).

    If the property is not currently rented, lease agreements are not required and Form 1007 or Form 1025 may be used.

    If there is a lease on the property that is being transferred to the borrower, see B2-1.5-03, Legal Requirements, B7-2-05, Title Exceptions and Impediments, for additional information.

    No Refinance Form 1007 or Form 1025, as applicable, and
    • copies of the current lease agreement(s).

    If the borrower is not using any rental income from the subject property to qualify, the gross monthly rent must still be documented for lender reporting purposes, see Reporting of Gross Monthly Rent.

    For additional information, see B3-3.1-08, Rental Income.

    *For a complete list of forms used in fulfilling requirements contained in the Selling and Servicing Guides, see the Guide Forms page. 

  • Q6.
    How is rental income determined if there is partial or no rental history on the tax return?

    Reconciling Partial or No Rental History on Tax Returns

    In order for the lender to determine qualifying rental income, the lender must determine whether or not the rental property was in service for the entire tax year or only a portion of the year. In some situations, the lender’s analysis may determine that using alternative rental income calculations or using lease agreements to calculate income are more appropriate methods for calculating the qualifying income from rental properties. This policy may be applied to refinances of a subject rental property or to other rental properties owned by the borrower.

    If the borrower is able to document (per the table below) that the rental property was not in service the previous tax year, or was in service for only a portion of the previous tax year, the lender may determine qualifying rental income by using

    • Schedule E income and expenses, and annualizing the income (or loss) calculation; or
    • fully executed lease agreement(s) to determine the gross rental income to be used in the net rental income (or loss) calculation.
    If ... Then ...
    the property was acquired during or subsequent to the most recent tax filing year,

    the lender must confirm the purchase date using the settlement statement or other documentation.

    • If acquired during the year, Schedule E (Fair Rental Days) must confirm a partial year rental income and expenses (depending on when the unit was in service as a rental).
    • If acquired after the last tax filing year, Schedule E will not reflect rental income or expenses for this property.
    the rental property was out of service for an extended period,
    • Schedule E will reflect the costs for renovation or rehabilitation as repair expenses. Additional documentation may be required to ensure that the expenses support a significant renovation that supports the amount of time that the rental property was out of service.

    • Schedule E (Fair Rental Days) will confirm the number of days that the rental unit was in service, which must support the unit being out of service for all or a portion of the year.

    the lender determines that some other situation warrants an exception to use a lease agreement, the lender must provide an explanation and justification in the loan file.

    If the borrower is converting a principal residence to an investment property, see B3-6-06, Qualifying Impact of Other Real Estate Owned, for guidance on using that rental income to qualify the borrower.

    For additional information, see B3-3.1-08 Rental Income.

     

  • Q7.
    What is required to document property management experience when using rental income?

    Requirements for Documenting Property Management Experience When Using Rental Income 

    To determine the amount of rental income from the subject property that can be used for qualifying purposes when the borrower is purchasing or refinancing a two- to four-unit principal residence or one- to four-unit investment property, the lender must consider the following:

    If the borrower... Then for qualifying purposes...
    • currently owns a principal residence (or has a current housing expense), and

    • has at least a one-year history of receiving rental income or documented property management experience

    there is no restriction on the amount of rental income that can be used.
    • currently owns a principal residence (or has a current housing expense), and

    • has less than one-year history of receiving rental income or documented property management experience

    • for a principal residence, rental income in an amount not exceeding PITIA of the subject property can be added to the borrower’s gross income, or

    • for an investment property, rental income can only be used to offset the PITIA of the subject property.

    • does not own a principal residence, and

    • does not have a current housing expense

    rental income from the subject property cannot be used.

    The lender must establish a history of property management experience by obtaining one of the following:

    • The borrower’s most recent signed federal income tax return, including Schedules 1 and E. Schedule E should reflect rental income received for any property and Fair Rental Days of 365;

    • If the property has been owned for at least one year, but there are less than 365 Fair Rental Days on Schedule E, a current signed lease agreement may be used to supplement the federal income tax return; or

    • A current signed lease may be used to supplement a federal income tax return if the property was out of service for any time period in the prior year. Schedule E must support this by reflecting a reduced number of days in use and related repair costs. Form 1007 or Form 1025 must support the income reflected on the lease.

    The lender must document the borrower has at least a one-year history of receiving rental income in accordance with Documenting Rental Income From Property Other Than the Subject Property above.

    Note: This policy does not apply to HomeReady loans with rental income from an accessory unit.

     

    For additional information on rental income requirements, refer to B3-3.1-08, Rental Income.

  • Q8.
    When can rental income be used?

    Eligible Properties

    Rental income is an acceptable source of stable income if it can be established that the income is likely to continue. If the rental income is derived from the subject property, the property must be one of the following: 

    • a two- to four-unit principal residence property in which the borrower occupies one of the units, or
    • a one- to four-unit investment property.

    If the income is derived from a property that is not the subject property, there are no restrictions on the property type. For example, rental income from a commercial property owned by the borrower is acceptable if the income otherwise meets all other requirements.

    Ineligible Properties

    Generally, rental income from the borrower’s principal residence (a one-unit principal residence or the unit the borrower occupies in a two- to four-unit property) or a second home cannot be used to qualify the borrower. However, Fannie Mae does allow certain exceptions to this policy for boarder income and properties with accessory units. See B3-3.1-09, Other Sources of Income for boarder income requirements, and B5-6-02, HomeReady Mortgage Underwriting Methods and Requirements for accessory unit income requirements.

    For additional information, see B3-3.1-08, Rental Income.

     

Income Assessment > Variable Income

  • Q1.
    Can per diem earnings or expense stipends be used as income?

    While every effort is made to include requirements for employment that generates income, some sources of income exist that may be variable in nature (such as per diem earnings or expense stipends) and are not specifically addressed in the Selling Guide.  As a result, the lender must evaluate and document the income in accordance with the policies in B3-3.1-01, General Income Information.  The documentation must support the income as stable, predictable and likely to continue. 

    Reimbursements for expenses (e.g., work-related supplies, travel, meals, and entertainment), are not considered wages as they are provided to the borrower for the purpose of offsetting a specific expense incurred while performing a service for the employer. When income is provided for discretionary use, not for the purpose of offsetting a specific expense, the lender can evaluate the income according to B3-3.1-01, General Income Information.

  • Q2.
    How is declining variable income evaluated?

    When evaluating variable income, after the monthly year-to-date income amount is calculated, it must be compared to prior years’ earnings using the borrower’s W-2’s or signed federal income tax returns (or a standard Verification of Employment completed by the employer or third-party employment verification vendor).

    • If the trend in the amount of income is stable or increasing, the income amount should be averaged.
    • If the trend was declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used.
    • If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the declination occurred.

    For additional information, see B3-3.1-01, General Income Information

  • Q3.
    How is variable income calculated?

    Variable Income

    All income that is calculated by an averaging method must be reviewed to assess the borrower’s history of receipt, the frequency of payment, and the trending of the amount of income being received. Examples of income of this type include income from hourly workers with fluctuating hours, or income that includes commissions, bonuses, or overtime. 

    History of Receipt: Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may be considered as acceptable income, as long as the borrower’s loan application demonstrates that there are positive factors that reasonably offset the shorter income history. 

    Frequency of Payment: The lender must determine the frequency of the payment (weekly, biweekly, monthly, quarterly, or annually) to arrive at an accurate calculation of the monthly income to be used in the trending analysis (see below). Examples: 

    • If a borrower is paid an annual bonus on March 31 st of each year, the amount of the March bonus should be divided by 12 to obtain an accurate calculation of the current monthly bonus amount. Note that dividing the bonus received on March 31st by three months produces a much higher, inaccurate monthly average. 
    • If a borrower is paid overtime on a biweekly basis, the most recent paystub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income. For example, borrowers may have overtime income that is cyclical (transportation employees who operate snow plows in winter, package delivery service workers who work longer hours through the holidays). The lender must investigate the difference between current period overtime and year-to-date earnings and document the analysis before using the income amount in the trending analysis. 

    Income Trending: After the monthly year-to-date income amount is calculated, it must be compared to prior years’ earnings using the borrower’s W-2’s or signed federal income tax returns (or a standard Verification of Employment completed by the employer or third-party employment verification vendor). 

    • If the trend in the amount of income is stable or increasing, the income amount should be averaged. 
    • If the trend was declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used. 
    • If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the declination occurred. 

    For additional information, see B3-3.1-01, General Income Information.

  • Q4.
    Is there a policy on employment gaps?

    Fannie Mae's underwriting guidelines emphasize the continuity of a borrower’s stable income. The stable and reliable flow of income is a key consideration in mortgage loan underwriting. Individuals who change jobs frequently, but who are nevertheless able to earn consistent and predictable income, are also considered to have a reliable flow of income for qualifying purposes.  

    To demonstrate the likelihood that a consistent level of income will continue to be received for borrowers with less predictable sources of income, the lender must obtain information about prior earnings. Examples of less predictable income sources include commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradesmen. 

    For additional information on income and employment requirements, see B3-3.1-01, General Income Information and B3-3.1-03, Base Pay (Salary or Hourly), Bonus, and Overtime Income.

Insurance > Project Insurance

  • Q1.
    Is a property insurance policy acceptable if all elements of the covered property are insured to actual cash value?

    No, all policies must be written at replacement cost coverage for all elements to ensure that the material used to restore the property is of like kind and quality. Actual cash value only provides a depreciated amount of coverage for the value of the remaining economic life of the item that it covers. As a result, the property owner would not be insured for the additional costs to replace the damaged item, which could be substantial.

Liability Assessment > Monthly Debt Obligations

  • Q1.
    Can separate maintenance payments be deducted from income in the same way as alimony payments?

    The definitions of separate maintenance and alimony are state-specific. If state law allows for similar treatment, separate maintenance may be treated the same as alimony.

    For additional information, see B3-6-05, Monthly Debt Obligations

  • Q2.
    What is required to evaluate a rental housing payment?

    Rental Housing Payment

    The housing payment for each borrower’s principal residence must be considered when underwriting the loan. For the following scenarios, the borrower’s monthly rental housing payment must be evaluated (if the borrower does not otherwise have a mortgage payment or no housing expense): 

    • for non-occupant borrowers, and 
    • for second homes or investment properties.

    The following list provides examples of acceptable documentation to verify the rental payment: 

    • six months canceled checks or equivalent payment source; 
    • six months bank statements reflecting a clear and consistent payment to an organization or individual; 
    • direct verification of rent from a management company or individual landlord; or 
    • a copy of a current, fully executed lease agreement and two months canceled checks (or equivalent payment source) supporting the rental payment amount. 

    Note: Refer to B3-5.4-03, Documentation and Assessment of a Nontraditional Credit History for rental payment history requirements when using non-traditional credit.

    For additional information, see B3-6-05, Monthly Debt Obligations.

Loan Application > Documentation

  • Q1.
    Can the sales contract include a rent back agreement in a purchase money transaction?

    The sales contract may include a rent back agreement in a purchase money transaction, however, if the loan is owner-occupied, the borrower must occupy the property within 60 days of closing as noted in the security instrument.  

    See also related Top Trending FAQ above: How is a rent back credit treated for qualifying purposes?

  • Q2.
    What is required if the borrower declares he or she is party to a pending lawsuit?

    Fannie Mae does not have a policy regarding a borrower who is a party to a lawsuit.  However, a lender should factor this in the underwriting of the loan (and ability to repay) as part of their overall loan decision, especially if the lawsuit has the potential for personal liability.  

    Having the box checked on the loan application would not make the loan ineligible on its own. 

Our Selling and Servicing Guides and their updates, including Guide announcements and release notes, are the official statements of our policies and procedures and control in the event of discrepancies between the information provided here and the Guides.