Pastors, priests, and ministers have a gratifying career filled with love, but when it comes to buying a home or refinancing, the clergy is not feeling the love. This comes from a beneficial, nontaxable form of income called pastoral housing allowance. The problem results from many lenders and banks not counting this often misunderstood income source. Usually, the issue stems from this clergy housing allowance not reporting on tax returns. Fortunately, you have come across this article, and hopefully, after reading, you are going to say, “Amen, someone finally understands my income!”
Housing Allowance for Pastors
A housing allowance is often a common and critical portion of income for pastors. It is a form of income to fully pay or at least allow a part of the expense to own or rent a home. Regretfully, the clergy has a difficult time getting qualified for a mortgage loan. Often, there is the sound of frustration and exhaustion when we receive calls from pastors, priests, or ministers.
Typically, pastors fall into this process: Decide to buy a home, choose a lender, get prequalified, get under contract for a home, provide income documentation, underwriting does not count the housing allowance because it does not report on tax returns, and then the pastor starts looking online for answers.
And here you are! Most of the referrals we receive for pastors buying a home come from this or other articles we have written on this topic. Luckily, within our company, we have experts on the subject including loan officers, operations, and underwriters. The tough part about clergy income is that it can be as simple as a taxable salary plus a monthly housing allowance check or some report the income as self-employed. Either way, we promise to dig deep and work to qualify clergy for a mortgage.
Let’s discuss the hurdles and solutions!
IRS Rules for Pastoral Housing Allowance
The IRS looks at the housing allowance portion of a pastor’s income as an exclusion from income. In other words, it is nontaxable. So, it does not report on the pastor’s tax returns. The IRS addresses how the exclusion works in their FAQ section. The question asks “Where do I report a minister’s housing allowance?” and continues with the definition and reporting requirements.
One would think that with the IRS direction, pastoral income should be pretty cut and dry. But it is not! There are many variations like the following:
- All housing allowance
- All W2 salary
- W2 salary with taxes coming out plus housing allowance
- W2 salary without taxes coming out plus housing allowance
- Housing allowance paid directly to the landlord or mortgage company
- Lumping all income together and reporting as self-employed
Pastoral Housing Allowance Letter
One of the required pieces of income documentation is a breakdown of income in the form of a letter. The following information must be provided to review a minister’s income:
- Last two years W2’s
- Last two years tax returns
- Most recent 30 days of paystubs
- Canceled checks for pastoral housing allowance (typically last 60 days)
- Pastor income breakdown letter
The previous item is different from documenting other income types. A letter must be provided to the lender to confirm the breakdown of the pastor’s income. The letter should give an analysis of all income received by the pastor, must be on church letterhead, and signed by someone with signing authority other than the borrower. Typically, the letter includes salary, pastoral housing allowance, insurance, retirement, car allowance, and reimbursements.
Housing Allowance Advantage
We have discussed how this form of income may be used to purchase or refinance a home. There is an additional benefit to pastoral housing allowance! Because the income is nontaxable, we can gross up the income. That means we can use a higher amount towards qualifying for a mortgage. The gross-up amount depends on the mortgage type and ranges from 15 – 25% higher than the actual check received. In the case of a VA loan, it could increase even higher!
Using a Pastoral Car Allowance to Qualify for a Mortgage
It is pretty standard for pastors to receive allowances besides housing. These include travel allowance, reimbursements, and car allowance. Counting a car allowance as mortgage income is possible but does require more detailed documentation. Typically, to an auto allowance as income or to offset the car payment, the borrower must provide the most recent 24 months of canceled checks from the church. Using this allowance as income or just to offset the debt depends on the mortgage program. But, we will determine which is allowed.
Student Loan Solutions for Pastors
Attending divinity school is not cheap. Scholarships, college savings, and working while in college are ways to pay for college. But, because of the high cost of a college education, many times, student loans are the result. Like the rest of America, many pastors have student loan debt, and it may hamper the home buying process. Fortunately, there are great home loan options that provide the ability to qualify easier with student loan payments.
Fannie Mae and Freddie Mac have improved their student loan guidelines recently and offer much greater flexibility for buyers with income-based repayment student loans. These conforming student loan guidelines are a lot more flexible than USDA or FHA. Fannie Mae will use an IBR payment of $0! Freddie Mac will use an IBR of $1 or higher! If a service member or military Veteran, VA offers a considerable amount of flexibility when it comes to student loans. VA will even allow using $0 as payment for deferred student loans. The requirement is the deferment is greater than 12 months after the home loan closing. So, don’t let student loans deter you from asking about a home purchase. There are wonderful solutions.
Loan Program Options for Pastors
A personal observation is it seems a good number of pastors are military Veterans as well. Luckily, VA loans reward Veteran clergy with its benefits. VA loans offer benefits such as no money down purchase, cash-out refinancing up to 100% of the appraised value, jumbo VA loans for higher-priced homes, waived VA funding fee for disabled Veterans, and flexible student loan guidelines (see below).
Another no money down purchase loan is the USDA Rural Development home loan. But, do not let the name fool you! It is not just homes way out in the country. A vast majority of the U.S. is USDA eligible. If you read other USDA articles on our site, you will see we mention how USDA is probably the most misunderstood and underutilized home loan. Many believe this loan option is for low income, low purchase prices, and farms, but quite the opposite is true. USDA loans have liberal income limits and loans up to the conforming loan limits. Additionally, USDA offers the lowest mortgage insurance and funding fee among the government loans.
FHA is best known for its flexibility, which includes credit, debt to income ratios, leaving collections open, low down payment, gift funds for a down payment (a gift from the church is allowed), the gift of equity purchase from family, and much more. Our FHA guidelines also work well for clergy and their scenarios, including pastoral housing allowance.
Fannie Mae and Freddie Mac have long been known for the preferred loan when a 20% down payment is involved. But, the new Fannie and Freddie include the conventional 97 programs – HomeReady and Home Possible. Both offer 3% down, allow gifted down payment, flexible debt to income ratios, and reduced mortgage insurance. Furthermore, they have become more lenient on student loan debt, which we expand on further below. Other advantages include adding non-occupying co-borrowers, a gift of equity purchases, second home and investment purchase or refi, mortgage insurance strategies, plus allow for simultaneous closing with a home equity line or loan.
It is easy to see how popular rehab projects are becoming. Whether it is remodeling a kitchen, bath, master suite, or outdoor entertainment area, creating your oasis is an exciting thought. Maybe there is an opportunity to purchase a primary, second home or investment property that needs work. Possibly there is storm damage. That is where purchase renovation or refinance renovation loans help make these dreams come true, and issues get solved—interested in making minor or extensive home improvements? Check out our VA renovation loan, Homestyle renovation, or FHA 203k loans.
Pastoral Housing Allowance? Contact OVM Financial
As a pastor, minister, or priest, do you have questions about purchasing or refinancing a home? Do you have trouble qualifying? Give us a call to discuss your scenario. As mentioned above, we will count as much income as possible including even grossing it up when allowed.