FAQ: Top Trending Selling FAQs

No, there is no defined threshold.  The lender must review all relevant information in the loan file to determine whether the qualifying income is reasonable and supported.  For example, if the year-to-date income amount appears unusually high or is otherwise inconsistent, the lender may need to obtain further supporting documentation.

The lender must obtain documentation that supports its determination that the income has stabilized. This may include, but is not limited to, recent consecutive paystubs showing consistent income for each pay period, or information from the borrower and/or employer that helps to explain the decline in income.

Examples of acceptable factors may include:

• Related Education or Training: The completion of a certificate, education, or other similar program for a borrower to gain the expertise to perform their current work-related requirements is an acceptable justification for stable employment. This must be documented and included in the loan file.
• Return From an Extended Absence: Borrowers who have been absent from the workforce for an extended period and have returned to work within the last 12 months must have their income and employment carefully evaluated to ensure it will continue. Examples of acceptable reasons for an extended absence may include: borrowers who were previously homemakers or borrowers who retired and are now returning to the workforce. When using income from these borrowers to qualify, lenders should consider:
  • The circumstances that enabled the borrower to return to work
  • How long the borrower has been back to work
  • The borrower’s employment history in the same or a related line of work
  • The borrower’s Active Duty Military status

Not necessarily. It depends on how the borrower was paid as a plumber assistant and how they are paid in their current position. If the income meets the definition of fixed base income, the lender may use the most income from the current position provided all requirements for fixed base income are met. However, if the income meets the definition of variable base income, the lender must document a minimum 12-month history of receiving variable income; therefore, the income may be calculated by using the Average Income method or the Average Hours method, and all other requirements for Variable Base Income must be met.

If the borrower is paid based on a fixed hourly rate and qualifies based on the minimum guaranteed number of hours that they are required to meet, and the income documentation supports at least this amount on a consistent basis, then the lender may consider this income as fixed.  However, if additional income is needed to qualify, the lender must follow the requirements for variable income.

If the two-month gap can be documented as a non-recurring event outside the borrower’s control that temporarily prevented them from earning income, that period may be excluded from the income calculation.

A recent change in line of work may affect the borrower’s capacity to repay the loan. The lender must evaluate the  borrower’s work history to determine whether it reflects a reliable pattern of employment and a reliable flow of income.

The lender must confirm the borrower has at least a 12-month history of receiving variable base income, and then calculate the income using one of the allowable methods:

1. Average Income: Evaluate the income trend, using income from each job, and calculate qualifying income using an averaging approach. If the income trend is declining, the income may not be acceptable. See B3-3.3-01, Base Income.
2. Average Hours: Determine the average monthly hours based on at least the most recent 12 months, and multiply by the current fixed hourly rate.

Not necessarily. A recent increase in income does not, by itself, trigger an automatic requirement for additional documentation. The lender must determine whether the documentation in the loan file supports the income used to qualify and that the income is stable and reasonably expected to continue.

A job change can affect whether overtime income is considered stable and likely to continue. The lender should determine whether the new role warrants a higher rate of pay. For example, the lender could consider whether the borrower is in the same line of work, or whether the new job responsibilities align with a higher pay rate.

Overtime income must be evaluated separately from base hourly pay and calculated using an earnings trend/average approach (using year-to-date and prior earnings, as applicable), not by applying an “average hours × rate” method. The “average hours” method is a calculation option for variable base income, not overtime income. See B3-3.3-02, Bonus, Commission, Overtime, and Tip Income.

Not necessarily. If the probationary period is described only as a standard post-hire employment term (and does not delay the start date or change the stated pay terms needed for qualifying), it is not considered a contingency for employment.

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 in the Selling Guide. Requirements will depend on whether a paystub will be obtained before delivery of the loan to Fannie Mae. See B3-3.3.03 Employment Offers and Contracts, for more details.

The lender may obtain the W2 for the prior year’s earnings, the year-end paystub reflecting total prior year’s earnings, or a Verification of Employment from the employer. Refer to B3-3.2-02, Standards for Employment-Related Income. Note: If the borrower’s income is validated by the DU validation service, the lender is not required to determine whether the borrower is employed by a family member or interested party.

When a borrower is working for more than one employer at the same time, the lender should confirm the borrower has a history of working more than one job at a time and that it is reasonable to believe the borrower will maintain the ability to earn from both employers for the foreseeable future. If the borrower does not have a history of working with these two employers for at least two years, the lender may consider the income from these two employers if the borrower has a history of at least 12 months simultaneously at these two jobs. If less than a two-year history is documented, the lender must confirm there are positive factors to reasonably offset the shorter income history and there is no employment gap greater than one month with either employer (unless the employment is considered seasonal).

When an income type requires a historical trending analysis as part of the income calculation, the trending analysis must be performed separately for each job, as applicable.

Yes. Under Fannie Mae guidelines, a borrower with seasonal employment may demonstrate the required two-year employment history using multiple employers, provided the employment is in the same line of work or industry and reflects a consistent pattern of seasonal earnings.

The lender must document:

• A two-year history of seasonal employment, which may include multiple employers;
• That the borrower’s seasonal income is stable, recurring, and reasonably expected to continue; and
• That any gaps between employment periods are consistent with the nature of the seasonal work.

Income must be analyzed and averaged in accordance with Fannie Mae requirements, and any material declines or inconsistencies must be addressed. If the borrower has recently changed employers or seasonal roles, the lender must ensure the employment change does not represent a significant change in income structure, job type, or stability.

If the seasonal income does not meet Fannie Mae’s continuity or stability requirements, it may not be used for qualifying purposes.

If the gap occurred within the most recent 12 months, it is acceptable for the timeframe of the gap to exceed 30 days.

However, the lender must carefully analyze the borrower’s current employment to ensure that it is likely to continue.

The lender must obtain and review documentation to support that the current income level has stabilized after the decline. If the lender cannot confirm stabilization, the income is not eligible for qualifying.

Examples of documentation that may support stabilization include:

• Recent consecutive paystubs and year-to-date earnings reflecting a consistent level of income after the decline
• Employer-provided verification or written documentation supporting stability of the current pay structure and/or explaining the reason for the decline
• Documentation supporting a non-recurring event outside the borrower’s control that temporarily prevented earnings

No. Under Fannie Mae guidelines, bonus income and commission income are evaluated as separate income types and must each independently satisfy the required history and stability requirements. Income from different pay structures may not be combined to establish the minimum history for either income source.

Each income type must be separately documented, analyzed for continuity, and averaged in accordance with Fannie Mae Selling Guide requirements. If the borrower does not meet the required history for a specific income type, that income may not be used for qualifying purposes. To be used for qualifying, the borrower must document a sufficient and consistent history of the same type of income being analyzed. Therefore, 12 months of bonus income followed by 12 months of commission income does not meet the history requirement for either bonus income or commission income.

Yes, provided the bonus income meets Fannie Mae’s requirements for stability, continuity, and likelihood of continuance as well as the requirements in B3-3.3-02, Bonus, Commission, Overtime, and Tip Income. When a bonus is paid annually or at another time during the year, the lender may use historical bonus income documented on prior year’s pay stubs, W 2s, and/or the borrower’s federal income tax returns to determine the qualifying amount and to accurately annualize the bonus, as applicable.

The lender will need to refer to the specific income type that the borrower was earning prior to the borrower taking temporary leave as reflected in B3-3.3, Sources of Employment Related Income. For further details, refer to B3-3.3-09, Temporary Leave Income.

The lender must obtain a completed request for verification of employment (Form 1005) that shows restricted stock distributions or the most recent paystub showing receipt of restricted stock income and two years’ W-2s. Additionally, the lender must obtain:

• evidence stock is publicly traded;
• current vesting schedule reflecting past and future vesting;
• 200-day moving average stock price (for income paid in shares);
• brokerage or bank statement showing receipt of previous year(s) distribution of restricted stock and, at a minimum, the number of vested shares or cash equivalent; and
• a verbal VOE (see B3-3.1-04, Verbal Verification of Employment, for specific requirements).

When rental income is being used to qualify for a property placed in service in the current calendar year, for example, when converting a principal residence to an investment property, the lender is justified in using a fully executed current lease agreement to document rental income. When using the lease agreement, the lease agreement amount must be supported by 

• Form 1007 or Form 1025, as applicable, or
• evidence the terms of the lease have gone into effect. Evidence must include a minimum of:
  • two months consecutive bank statements or electronic transfers of rental payments for existing lease agreements, or

  • copies of the security deposit and first full month's rent check with proof of deposit for newly executed agreements. 

     

Calculating Monthly Qualifying Rental Income (or Loss)

The amount of rental income that may be used to qualify may be restricted depending on whether the borrower currently has a housing payment and has a history of receiving rental income.

Scenario 1: If the borrower has a current housing payment and documented property management experience, then there are no restrictions on the amount of rental income that can be used. The lender must establish a history of property management experience by obtaining one of the following:

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  • 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
    • two years of the most recent federal income tax returns reflecting rental income received may be obtained to document that the property was in service for the full year (for example: a short-term rental receiving rental income for more than one year, but the fair rental days are less than 365 in each year).
  • 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.

Scenario 2: If the borrower has a current housing payment, but does not have documented property management experience, rental income can only be used to offset the PITIA of the related property.

In addition, the borrower must be qualified in accordance with, but not limited to, the policies in topics B3-4.1-01, Minimum Reserve Requirements, and, if applicable B2-2-03, Multiple Financed Properties for the Same Borrower.

Nontaxable income may be used to adjust (gross up) the borrower’s qualifying income when the lender verifies that the specific source of income is nontaxable and that the income and its nontaxable status are reasonably expected to continue.

The lender must verify the nontaxable status of the income using documentation such as award letters, policy agreements, account statements, tax returns, or any other document that address the nontaxable status of the income.

Nontaxable treatment is not limited to specific income types; however, several income types within B3-3.4, Other Sources of Income, explicitly reference nontaxable income within their individual requirements, including Child Support, Public Assistance, Section 8 Housing Choice Voucher Homeownership Program Payments, and Social Security. The requirements are included within each income source as well as referring the reader to B3-3.3-01, Variable Base Income, for further information.

If retirement income is received as distributions from a 401(k), IRA, or Keogh retirement account, the lender must determine whether the income is expected to continue for at least three years after the note date. Eligible retirement account balances may be combined to satisfy the three year continuance requirement. In addition, the borrower must have unrestricted access to the retirement accounts without penalty.

Income from a pension consisting of fixed payments or distributions must be documented with a minimum of three-year continuance. For example: if the pension has a cash value cap, then the lender must ensure that the remaining balance will support three years continuance from the note date.

The lender must verify that the borrower is currently receiving annuity, pension, or retirement income. Acceptable documentation may vary by income source and may include one or more of the following:

• A statement from the organization providing the income
• A retirement award letter or benefit statement
• A financial or bank account statement reflecting the income
• A signed federal income tax return
• An IRS Form W 2
• An IRS Form 1099

All documentation must support the lender’s determination that the income is stable and reasonably expected to continue for the required period.