Social security disability income recipients often experience difficulty during the home qualification process. Common issues include previous credit issues, debt to income ratios, and proving sufficient continuance of income. Yet, mortgage lending guidelines exist with disabled buyer solutions. Therefore, some education and a great lender can solve many income problems. Let’s discuss these issues and expand on some remedies.
Social Security Disability Income Requirements
It is possible for either adults or children with physical and/or mental disabilities to receive social security disability benefits. Disabled citizens are a protected class from discrimination in any way. Mortgage lending included. Sometimes disabled borrowers are victims of unintentional discrimination. Mortgage guidelines require a 3 year likelihood of continuance for qualifying income. Older mortgage guidelines required a 3 year proof of continuance to count social security disability income. Although, this was extremely difficult to prove in many cases. Furthermore, it is illegal.
Per the Consumer Financial Protection Bureau (CFPB), the practice of requiring proof of disability continuance is discriminatory. The CFPB reminds lenders that disabled persons are a protected class under section B of the Equal Credit Opportunity Act (ECOA) and should be treated fairly. Even though there are limits for verification, income must be proven to count it.
How to Prove Disability Income
In order to prove social security disability income, it is pretty simple. So simple that anyone can supply the documentation.
- Disability income award letter
- Proof of receipt
- Disability for dependents (to count dependent’s disability)
- Proof of age
- Proof claimed as dependent
The Social Security Administration provides a social security award letter every year. It states the amount to be received each month. By providing this along with a monthly bank statement, it will prove the borrower’s income. Additionally, disability income received in the borrower’s name for dependents may be used for qualifying income. In most cases, the borrower must prove the child is a dependent. Since the income is not directly for the disabled borrower, the age of the child must be proven. This is to show the dependent income should continue 3+ years.
When a borrower misplaces the disability award letter, a request may be made to the Social Security Administration local office. They will gladly print a duplicate.
Grossing Up Nontaxable Income for Easier Qualification
In addition to count social security disability income for mortgage qualification, a higher amount may be used. Because disability income is nontaxable, lenders are allowed to increase the income to compare more equally to gross monthly incomes. Allowed grossing up limits are based on the loan program. Grossing up limits per home loan programs are…
- FHA 15%
- Fannie Mae & Freddie Mac Conventional 25%
- USDA Loans 25%
- VA Loans 25% (Possibly higher)
Nontaxable Income Gross Up Example
Assuming $1,000 per month in disability income using each gross up percentage above.
- FHA = $1,150
- Conventional = $1,250
- USDA = $1,250
- VA Loans = $1,250
Why does this matter? A $150 or $250 higher income in the examples above could be just enough to make the difference in a mortgage denial and mortgage approval! Imagine receiving $1,000 plus disability income for dependents as well. Grossing up helps even more for every bit of nontaxable income.
Do not forget other forms of nontaxable income which may be increased in the same way. These include child support, VA disability, pastoral housing allowance, railroad retirement, foster care, some levels of social security, and more.
Additional Solutions for Mortgage Qualification
Gladly, there are several other mortgage solutions other than grossing up nontaxable income. Other possible ways to help borrowers with social security disability income qualify include…
- Adding a co signor
- Additional disability income
- Retirement income
- Employment income
- Higher debt to income ratio programs
Non Occupying Co Borrower
For buyers with sufficient credit, yet short on income, a solution could be a co signor. Furthermore, the co signor does not even have to live in the home. What a wonderful solution for a disabled borrower! So, FHA and conventional loans allow co borrowers to assist in qualifying and the co borrower is not required to live in the property. Quite a solution!
VA Disability Income
Even though disability income could be sufficient for a borrower’s approval, the purchase price and/or debt level may require additional income. Just about any other source of documentable income is allowed. Sometimes a disabled person may also receive VA disability income. Both are allowed as income and grossing up.
Another form of income includes retirement income which may come in several forms such as a pension, early retirement, or an IRA / 401k distribution. It is even possible to count a brand new form or retirement income. One area many forget is to use a new withdrawal from a qualified retirement account. As long as it is set up, one monthly income distribution is received, and it is reasonable to expect it to continue 3 years, it could work.
Employment Income While Disabled
Actually, disability income and employment are possible at the same time. Though, SSA may have restrictions on disabled persons’ employment while receiving disability. But, if the borrower has employment for a sufficient period of time, an underwriter could count that income.
Mortgage Programs with Higher Debt Ratios
With strong enough compensating factors, borrowers may qualify with higher than the old standard 36% maximum debt to income ratio. Actually, it is common for borrowers to receive approvals at 45%. Additionally, debt ratios up to 55% or even more is possible on VA and FHA loans! Conventional loans potentially allow up to 50% debt to income ratio too.
Check Into Property Tax Exemptions & Discounts
Each state has special property tax discount programs. Exemptions and discounts are most commonly available to senior citizens, disabled, disabled Veterans, and low income homeowners. Here are a few examples of property tax discount programs…
Not sure about qualifying with disability and/or other income? Contact us now.