Stable Monthly Income FAQ

No. If a borrower has income not specifically addressed in Topic 5300, the Seller must determine whether the income may be considered and supported as stable monthly qualifying income from an acceptable and verifiable source. This determination must take into consideration the general requirements for all stable monthly income in Chapter 5301 as well as the specific requirements applicable to the income and earnings types outlined in Chapters 5302 through 5306. The Seller must take into account the income and/or employment characteristics and factors including, but not limited to, an acceptable history of receipt, a reasonable expectation of continuance and probability of consistent receipt, accurate calculation and sufficient verification documents in accordance with the general requirements of Topic 5300. Note: Reimbursements for employment related expenses and/or per diems and stipends paid to offset work-related expenses (e.g., travel, lodging, meals, work-related supplies) are not considered qualifying income as the funds are paid to reimburse a borrower for an expense incurred that is directly related to the amount paid to the borrower.

10-day Pre-Closing Verification (PCV) (Section 5302.2(d))

Question: The 10-day PCV verifies the borrower’s employment status as employed; however, I have other information that indicates the borrower may be furloughed or laid off. Is it acceptable to use the 10-day PCV as confirmation of the borrower’s employment status? [NEW 12.06.23] Answer: No, the Seller’s knowledge that the borrower may be furloughed or laid off contradicts a reasonable expectation of continuance and probability of consistent receipt of income. In this scenario the Seller must resolve the discrepancy, which may require updated income documentation, before proceeding with using the income for qualifying.

Yes, all documentation provided must support the stable monthly income used to qualify, in accordance with the requirements and guidance in Guide Topic 5300.

Guide Bulletin 2021-12 announced updated requirements for obtaining a 10-day PCV to permit an email exchange from the independently obtained employer's work address. For example, if the borrower is employed at ABC Preschool, the Seller could conduct an internet search to find information on ABC Preschool. The internet search returns abcpreschool.com which lists the preschool director’s email address. This email address can then be used to verify the information required in Guide Section 5302.2.

Yes. However, the Seller must still verify the email address independently from the address provided by the borrower, as described in the question directly above. For example, the Seller conducts an online search and sees that the provided email address matches the domain name for the company website.

Yes. As long as the information required in Guide Section 5302.2 can be verified, a generic email address (as opposed to a specific email address for an individual) can be used to verify the borrower’s employment.

Question: The requirement states that the year to date paystub used for a 10-day PCV must be dated no more than 15 business days prior to the note date. If the borrower is paid monthly and has not yet received a more recent paystub, is there an exception to this requirement? [NEW 12.06.23] Answer: No. The purpose of the 10-day PCV requirement is to verify that the borrower remains employed as close to closing as possible. Another 10-day PCV method must be used in this scenario.

Age of Tax Return Requirements (Section 5302.4(b))

We encourage Sellers to always confirm with the borrower that the tax returns provided are the tax returns most recently filed with the IRS. Sellers may perform additional due diligence, such as obtaining verification from the IRS that the tax transcripts are not yet available.

Question: If the IRS Income Verification Service (IVES) program is experiencing delays, it may not be possible for Sellers to obtain verification that no tax transcripts are yet available. Is it acceptable for this verification to be obtained by the borrower directly from IRS? Answer: Yes, electronic verifications provided by the borrower are acceptable. Refer to Guide Section 5102.3, Written verifications, for additional information.

1 This table is provided for illustrative purposes only. Refer to Guide Section 5302.4(b) for complete requirements.

Question: For most states, 4/15/24 is the IRS due date for filing 2023 tax returns; however, for Maine and Massachusetts, the due date is 4/17/24. For Mortgages in these states, is it acceptable to use 4/17/24 as the Application Received Date for the purposes of meeting the requirements in Section 5302.4(b)(i)? (New 2/07/24) Answer: Yes; this approach is acceptable and is consistent with the intent of our requirements.

No. Sellers may manage the application and note date requirements within their origination and underwriting processes as appropriate (e.g., conversations with the borrowers at application to provide expectations and/or placing conditions on loans when the note dates may exceed the timeframes).

No. The note date requirement of November 1 must be met, regardless of the reason for the tax returns being unavailable. In order to qualify for the mortgage, stable monthly income must be established, which requires reasonably recent documentation. Income documentation that is close to two years old (or more) does not meet this requirement.

Question: Will the table for the age of tax returns requirements in Section 5302.4(b) be applicable after 2024? The table has very specific years (e.g., 2022, 2023) rather than being written in more general language (e.g., tax returns from the most recent calendar year). (Revised 2/07/24) Answer: Yes. The table will continue to be updated to reflect either the relevant years or with language describing a general approach.

The overarching requirement is the determination of income stability, which has not changed. The guidance offers examples of various things a Seller may choose to do to help ensure continued income stability when the tax returns are older. One or more options may be used, and the documentation is not limited to these examples. The Seller must determine when and how to apply this guidance. Additional documentation may be necessary to evaluate, justify and explain the qualification of the borrower. This includes scenarios in which the Seller has knowledge that the documentation provided by the borrower may not be reflective of the borrower’s current level of income, even though it meets the age of documentation requirements.

Related Bulletins: 2021-2, 2021-16, 2022-2, 2023-3, 2024-1 Originally Published: January 2021 Last Updated: 2/07/24

Income Reported on IRS Form 1099 for Services Performed (Section 5303.2(d))

Question:The borrower’s pay structure recently changed from W-2 income to 1099 income. The borrower was a salaried employee in receipt of W-2s for five years; however, the borrower changed companies four months ago and will be paid with a 1099 but is performing similar work in the same industry. Why must a 12-month history of income and expenses be documented on the IRS Schedule C if the gross income is similar or higher and the borrower’s line of work has not changed? [NEW 09.07.22] Answer: Stable monthly income must be verified with reasonably reliable third-party documentation in all instances. Because 1099 borrowers typically report business expenses on Schedule C, the income amount used to qualify the borrower must take business expenses into account. When there is no history of 1099 income on the tax return, the level of the borrower’s business expenses is unknown and accurate stable monthly income cannot be established.

Sellers are encouraged to perform a pre-closing verification confirming that the borrower continues to perform services for the provider of the 1099 income as close to the note date as possible. Although the standard 10-day PCV requirements are for “employed” income and do not fully accommodate 1099 income for services performed, Sellers may apply the methods described (e.g., verbal verification or email through an acceptable third-party source) to verify that the borrower continues to perform services for the provider(s) of the 1099 income. The expectation is for Sellers to obtain a pre-closing verification if that process is possible; however, due to the varied nature of the income (e.g., multiple or changing sources), it is acknowledged that at times, a pre-closing verification may be challenging to obtain. Due to these factors, pre-closing verification is encouraged but is not required; however, that does not relieve the Seller of the obligation to verify stable monthly income.

Borrowers with Business Ownership Interest(s) Less Than 25% (Section 5303.2(d))

The requirements and guidance in Section 5303.2(d) are intended for non-self-employed borrowers. However, in some instances the use of these requirements may be appropriate when a borrower has less than 25% interest in one or more businesses but also has additional business(es) where the ownership interest is 25% or greater (i.e., the borrower is self-employed). It is up to the Seller to determine the appropriate stable monthly income treatment for additional business ownership interests less than 25% for self-employed borrowers. For instance, if the majority of the borrower’s stable monthly qualifying income is earned from a professional services partnership (e.g., large accounting firm) where a fractional ownership interest is held (non-self-employed income), but income from a small sole proprietorship (i.e., self-employed borrower) is also present, the Seller may use the non-self-employed requirements for the fractional interest partnership in conjunction with the self-employed requirements for the sole proprietorship.

Yes, the requirements and guidance in Section 5303.2(d) apply to non-self-employed borrowers with business ownership interests less than 25%, regardless of whether the borrower owns one or more businesses.

Question: The requirements state that historical cash distributions must be reasonably consistent with the ordinary business income reported on the K-1. If the historical cash distributions are less than the ordinary income, is the income automatically ineligible? [NEW 12.06.23] Answer: This requirement provides a reasonable assurance of a viable income source due to the minimal analysis and documentation required to use the income coupled with the broad array of scenarios present with this income characteristic. The income is not automatically ineligible if the historical cash distributions are not reasonably consistent with the ordinary business income reported on the K-1s. Sellers may underwrite the income in accordance with the requirements and guidance in Chapter 5304, including business review and analysis in Section 5304.1(d).

Employed Income Calculation Guidance and Requirements (Section 5303.4)

Yes, the YTD paystubs must be considered. All documentation in the mortgage file must support the Seller’s income analysis and calculation.

Question: If the earnings are fluctuating hourly and a minimum number of hours worked per pay period (e.g., 32 hours per week) is verified based on a review of the prior year and YTD income, is it acceptable to calculate weekly gross income using the verified minimum number of hours worked (e.g., 32 hours x $25 x 52 weeks/12 months)? [NEW 11.01.23] Answer: Yes.

Question: If the earnings are fluctuating hourly and qualifying income is calculated using the verified minimum number of hours worked per pay period, as described in the question directly above, does the requirement for minimum 12 months of history of primary employment still apply?
[REVISED 11.8.23] Answer: Yes. Because the earnings are fluctuating hourly, the 12 months history requirement and all other requirements for fluctuating hourly earnings apply.

Question: The income consists of base fluctuating hourly employment earnings and overtime. The Single-Family Seller/Servicer Guide (Guide) requires documentation of two prior years of income for calculating the overtime income, and one prior year for calculating the base fluctuating hourly earnings. Must the calculation of base fluctuating hourly earnings include earnings from the two prior years instead of most recent calendar year because the documentation is present in the loan file? [NEW 11.01.23] Answer: No, the calculation method in Section 5303.4(d) requires that the income calculation be based on the most recent year(s) and year-to-date (YTD) income over the applicable number of months of “required history and documentation.” Although the mortgage file includes verification of income for the two prior years, the Seller may calculate base fluctuating hourly earnings using only YTD and the most recent calendar year income. The written income analysis or other documentation in the loan file should make clear what calculation was used. For all qualifying income, the Seller must not have knowledge, information or documentation that contradicts a reasonable expectation of continuance or probability of consistent receipt of income over at least the next three years.

Question: When calculating the income average for fluctuating hourly earnings and/or additional employed earnings such as overtime and commission, the requirements state to average the most recent year(s) and YTD income over the applicable number of months of required history and documentation. If there was an occurrence (e.g., illness, injury) that prevented the borrower from working and/or earning full income for a period of time, is it acceptable to exclude that period of time from the average number of months used in the calculation? Is there a minimum length of time that must be used in the calculation? [NEW 6.17.24] Answer: Yes. In certain instances, the calculation may be based off a shorter number of months if the Seller provides a written justification and/or documentation to support the applicable months used in the calculation. The total number of months used in the calculation must be at least 12 months. Additionally, the calculated income must be reasonably expected to continue for at least the next three years. For example, the borrower has a 10-year employment history as a server earning tips with a small restaurant. The June 2024 YTD paystub, 2023 W-2 and 2022 W-2 have been provided. While the June 2024 YTD paystub and 2023 W-2 earnings support approximately $60,000 in tip income per year, the 2022 W-2 earnings appear low at $30,000. Documentation in the file verifies that the restaurant was closed for renovations from April through September of 2022 which supports the reduced tip income, so it is reasonable to exclude the 2022 earnings from the calculation and average the most recent 18 months of income.

Question: The earnings on the YTD paystub represent fluctuating hourly earnings and a pay raise was received from $25.00 per hour to $28.00 per hour at the end of March in the current calendar year. What additional documentation is needed to apply the calculation method for raises that permits the current pay rate to be applied to the average number of hours worked and what calculation would I apply? [NEW 11.01.23] Answer: In order to apply this calculation method, the Seller must calculate the average number of hours worked over the prior year and the current year. Information about average hours worked at each pay rate is needed to perform this calculation. For example, the following additional documentation can be used to establish this information: the YTD paystub from March showing the prior rate of pay of $25 per hour, and the year-end paystub from the prior year showing the prior rate of pay at year-end of $25 per hour. If a pay raise was received mid-year in the prior year, additional paystubs from the prior year could also be obtained to support a higher qualifying income, but the calculation would become more complex. Although some paystubs will reflect the YTD hours worked, many will not, so for the purpose of an example we’ll assume the paystub does not provide this information. In that case, the following calculation method that establishes the average hours worked includes dividing the YTD and prior year income by the prior rate of pay and the new rate of pay, as applicable, based on when the raise(s) occurred, as follows:

In comparison, if instead of using the calculation method above, the prior year and YTD income are averaged, the monthly qualifying income would be less: $45,650 (prior year) + $26,000 (YTD 6 months) / 18 months = $3,980 per month qualifying income. Both are acceptable calculation methods.

Question: The written VOE documents fluctuating hourly earnings and a raise received this calendar year. The written VOE also shows an entry for “average hours per week.” May this field be used as a verification of the average number of hours worked during the prior and current year in order to calculate income using the current rate of pay? [NEW 11.01.23] Answer: No. Unless the verification clearly specifies that the average number of hours worked provided is representative of the current YTD and complete prior calendar year hours.

No. The acceptable verification methods are outlined in Chapter 5302 and do not include letters from employers. If a Seller uses a letter from an employer due to challenges encountered when trying to verify this information, Freddie Mac may consider the information depending on the format and content of the letter (e.g. if employer name, title, signature, contact information and verification date are present), if the employment is arms-length and the written analysis details why this information was not attainable using the verification methods in Chapter 5302.

The calculation is based on comparing the annualized earnings for the current year to the prior year earnings as follows: the prior year earnings amount is subtracted from the current earnings amount, the difference is then divided by the prior year earnings amount and multiplied by 100. For example:

• $31,000 / 6 months (YTD) = $5,166.67
• $5,166.67 x 12 months (annualized) =$62,000

Tax Exempt Income

Yes. If the information on IRS.gov clearly shows that the income, or a portion of the income, is not taxable, it's acceptable to use a printout that contains that information.

Question: If the borrower’s tax return from the most recent calendar year is in the mortgage file and shows the taxable income, but the level of income has changed from the prior year to the current calendar year due to a documented event (e.g., recent retirement with an income decrease, recent C.O.L.A. increase) that changes the tax-exempt income amount, is it acceptable to use a printout from IRS.gov that documents the relevant information as evidence that the income, or a portion of the income, is tax exempt for the current calendar year? (NEW 02/07/24) Answer: Yes.

Trust Income

No, this is not acceptable. The Guide requirements in Section 5305.2 for trust income are intended for established trust income and are not to be used as a substitution for income from an asset depletion program. Certain assets of the borrower may be used for the repayment of their monthly obligations for qualification purposes. Refer to Section 5307.1 for requirements.

Alimony, Child Support or Separate Maintenance Income Documentation

• Handwritten or typed receipts.
• Letter from the borrower indicating the income payment was received.

• A screen shot evidencing transfer of the payment(s) and the borrower’s name.
• A monthly account statement evidencing transfer of the payment(s) and the borrower’s name.
• A screen shot that evidences transfer of the payment(s) and ties the account to the borrower’s bank account.

An agreement not ordered through the court and signed by both parties may be considered legally binding documentation depending on the laws of the state or jurisdiction. The Seller should consult with their legal counsel to determine if the documentation used to verify the payor’s obligation meets the state or jurisdiction requirements to be considered legally binding.

Question: When the payment amount for alimony, child support or separate maintenance income has been renegotiated resulting in a higher monthly payment amount (e.g., $900 per month increased to $1,000 per month), can the higher payment amount to be used as qualifying income immediately? Answer: No. The higher amount may only be considered stable monthly income when receipt of the income has been documented for the required number of months per the Single-Family Seller/Servicer Guide (Guide).