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9.3 ANNUAL INCOME [7 CFR 3555.152(b)]
Annual income includes all eligible income sources from all adult household
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members, not just parties to the loan note. The annual income for the household will be used to calculate the adjusted annual household income. The adjusted annual income determines if the household is eligible for a guaranteed loan.
A. Income that is Never Counted
7 CFR 3555.152(b)(5) lists income sources that are never included in the annual income calculation. Refer to Attachment 9-A to review income and asset types, guidance for annual and repayment purposes, and documentation options acceptable to verify the income or asset source.
B. Calculation of Annual Income
Annual income is calculated for the ensuing 12 months, based on income verifications, documentation, and household composition. Lenders must examine all evidence to ensure the calculation is supported.
In addition to 7 CFR 3555.152(b) and Attachment 9-A, lenders must consider the following to calculate annual income:
x Use the gross amount, before any payroll deductions, of base wages and salaries,
overtime pay, commissions, fees, tips, bonuses, housing allowance, and other compensations for personal services of all adult members of the household, unless they meet the exclusion criteria of 7 CFR 3555.152(b)(5) and Attachment 9-A. Documented cost of living allowances or wage increases that will be effective on or before loan closing must be included in the annual income calculation. x Include the first $480 of earned income from adult full-time students who are not
an applicant, or a spouse of an applicant. x Include the income of an applicant’s spouse, unless the spouse has been living
apart from the applicant for at least three months (for reasons other than military or work assignment), or court proceedings for divorce or legal separation have been commenced. Evidence to support living apart for three months may include, but is not limited to, an apartment lease, bills, or bank statements in their name alone delivered to a different address, etc. This guidance applies to domestic partners, significant others, and fiancée’s that are currently living with the applicant as a household/family unit. This guidance does not apply to adult
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dependents age 18 and up. x An adult household member that is currently unemployed but is seeking new
employment must have their previous earnings included in annual income. The previous earnings are not required to be included when there is documented evidence to support they are not seeking to be reemployed, such as a tendered resignation, official termination from previous employer, or a signed statement from the adult household member that they do not plan to pursue new employment. x Income verifications provided by applicants that do not currently support
historical earnings with the same employer (e.g. less hours worked, less overtime, less bonus, declining self-employment income, etc.) must be carefully reviewed to determine appropriate calculations. x Verified changes of income amounts or sources in the ensuing 12 months must be
documented. Examples include, but are not limited to, pending retirement, resignation tendered, documented raise that will occur prior to loan closing, etc. x When an income source will not be received for the entire year, the amount
anticipated to be received within the ensuing 12 months must continue to be included in annual income unless excluded under 7 CFR 3555.152(b)(5). Examples include, but are not limited to, child support, alimony, maintenance, Social Security, etc. Annual income is the total of all income sources for a 12- month timeframe. Income calculations must state the income source, the number of months receipt remaining for the ensuing 12- month timeframe, and the total amount to be received.
Lenders are responsible for accurately calculating annual household income. The calculation should be logical based on the history of income and documentation provided. Training is available on the USDA LINC Training and Resource Library website, located at https://www.rd.usda.gov/resources/usda-linc-training-resource-library/lender-training.
Annual income calculations will typically vary from adjusted annual and repayment income.
C. Income of Temporarily Absent Household Members
A household member is defined as all persons routinely living in the dwelling as a
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principal residence, except for live in aides, foster children, and foster adults (7 CFR 3555.10). If a member of the household that will make the dwelling their principal residence is temporarily absent, their income must be included.
D. Applicant Assets
Income earned from non-retirement assets may be required to be included in the annual income calculation, as applicable. Refer to paragraph 9.4 for guidance.
E. Verification Requirements
Lenders must verify income and asset documentation provided by applicants and other adult household members. Lenders will verify the income for each adult household member for the previous 2 years. The following guidance will assist:
x Written, oral, or electronic verifications, and documents provided or prepared by a third-party verification (TPV) vendor are acceptable, unless otherwise specified. These verifications must be provided directly to the lender.
x Lenders may not accept verifications or documents transmitted by, or passed through, an interested third party such as builders, real estate professionals, or sellers.
x Facsimiles, photocopies, digital images, and computer-generated documents may be accepted in lieu of original forms, unless otherwise specified.
x The lender is responsible for the integrity and accuracy of the information in the mortgage underwriting file. Regardless of the type of documentation used to support the loan application, the documents must be legible and free of any alterations, erasures, “white-outs,” or similar indications that changes have been made.
x Verification documentation of household annual, adjusted annual, and repayment income will be retained in the lender’s permanent case file.
x Paystubs/earning statements must include adequate information to calculate income and include year-to-date earnings. The lender must utilize paystub(s)/earning statement(s) that are dated no earlier than 30 days prior to the
(03-09-16) SPECIAL PN 9-4 Revised (08-05-25) PN 649
Guidance documents lack the force and effect of law, unless expressly authorized by statute or incorporated into a contract. USDA may not cite, use, or rely on any guidance that is not available through their guidance portal, except to establish historical facts.
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initial loan application date. x W-2 forms must include the most recent one or two years, as applicable. W-2s
must clearly identify the applicant and employer.
x Lenders must obtain one of the following documents to verify previous
employment: W-2, written VOE, electronic VOE, third-party verification, or evidence of applicable education or military service. Lenders may require additional documentation for previous employment when they determine it is needed to support their income calculations.
x Tax returns for self-employed borrowers must be copies of the original returns
filed with the IRS and include all supporting schedules. Lenders may substitute IRS transcripts obtained directly from the IRS with all supporting schedules. The most recent tax return refers to the last return filed as determined by IRS schedule/deadlines. Lenders must continue to obtain the most recent two years of returns, as applicable. Applicants must not be delinquent on federal taxes as determined by the IRS. x Applicants with an approved IRS extension for the current tax year may continue
to be eligible if they are not delinquent on taxes owed, as determined by the IRS. Evidence of tax payments made, if applicable, must be retained in the lender’s permanent loan file in accordance with Chapter 10 of this Handbook. x Income and asset documents and verifications cannot be greater than 120 days old
at time of loan closing. Divorce decrees, income tax returns, and other documents that do not expire will continue to have the most recent or filed copy accepted. x Applicable income and asset documents greater than 120 days old at the time of loan
closing must be updated or re-verified to support applicant/household eligibility.
For all loan types, lenders must verify the income for all applicants and adult household members (excluding eligible full- time students ages 18 and above) through one of the following documentation methods. Refer to Attachment 9-A for documentation and verification options that are acceptable to support income types.
1. Full Income Documentation – Non-Self-Employed
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x W-2 forms for the most recent two tax years, which may be electronically generated or provided in paper format, or IRS Wage and Income transcripts; x Paycheck stubs or payroll earning statements that report the most recent four weeks of earnings; and x Prior to loan closing, a Verbal Verification of Employment (VVOE) must be obtained for all applicants within 10 business days of loan closing. A written verification or email confirmation (other than a paystub), that confirms the applicant’s current employment status within this time frame is also acceptable. The documentation must include the name and title of the person who completed the verification for the employer. This verification will be retained in the lender’s permanent loan file. Adverse changes to the applicant’s employment may render the loan ineligible.
2. Alternative Income Documentation – Non-Self-Employed
x Written Verification of Employment (VOE): Electronically generated
verifications from the employer or a verification service utilized by the employer, Form RD 1910-5, Request for Verification of Employment, or an equivalent HUD, VA, Fannie Mae, or Freddie Mac form may be utilized to verify the current year-to-date (YTD) and previous year’s employment earnings. This verification must confirm base income/wages, bonus, overtime, commissions, and other income sources earned, as applicable;
x Recent paycheck/earnings statement: Lenders must compare a recent paystub
that includes YTD earnings and employment information to the VOE to confirm these two documents reasonably agree; and x Prior to loan closing, a Verbal Verification of Employment (VVOE) must be
obtained for all applicants within 10 business days of loan closing. A written verification or email confirmation (other than a paystub), that confirms the applicant’s current employment status within this time frame is also acceptable. The documentation must include the name and title of the person who completed the verification for the employer. This verification will be retained in the lender’s permanent loan file. Adverse changes to the applicant’s employment may render the loan ineligible.
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3. Self-Employed Income Documentation
Applicants or household members are considered self-employed when they have a 25 percent or greater ownership interest in a business. If the ownership interest is less than 25 percent, neither the “Business Owner” or “Self-Employed” options should be selected in GUS.
Federal Income Tax Returns for the business will be required when ownership is 25 percent or greater. The lender must analyze the most recent two-year history of the business earnings. Sharp increases or decreases in self-employment income may require the lender to review additional documentation to support their calculation of annual, adjusted annual, and repayment income. Sharp increases or decreases are defined as a 20 percent or greater variance for income earnings from the previous 12 months. The lender’s permanent file must contain the following, as applicable:
x Federal Income Tax Returns (filed and signed) for the most recent two
consecutive years with all schedules, or IRS transcripts that include all applicable schedules; x Federal Income Tax Returns for the business (filed and signed) for the most
recent two consecutive years with all schedules, or IRS transcripts that include all applicable schedules, if required for the ownership interest/business type; x Recent profit and loss statement (not required to be audited); and
x Confirmation the business is operational, obtained within 30 days of the loan
closing. Documentation may include evidence of a website, additional internet documentation, licensing bureau certification, etc. Adverse changes to the business may render the applicants ineligible. Lenders may utilize Fannie Mae Form 1084, Cash Flow Analysis, Fannie Mae Form 1088, Comparative Income Analysis, or a comparable self-employment evaluation form(s), and Attachment 9-E to assist in the calculation of self- employment income. A business (full time or part-time) that is closed may be removed from consideration for annual income when the applicants provide a letter of explanation
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and documentation to the lender which details: 1. When the business was closed; 2. Why the business was closed; 3. How the business was closed; and 4. Evidence, satisfactory to the lender, to support the closure of the business.
REMINDER: Refer to Attachment 9-A for documentation options and verification requirements of additional income and asset types that may apply to the household. If a specific income or asset type is not listed, refer to 7 CFR 3555.152. All income and asset types must be documented and verified. The lender must retain all documentation and calculations in their permanent loan file.
4. IRS Transcripts: Verification of Income
IRS transcripts are required for all required household members in addition to the documentation option selected by the lender. Lenders must require each adult household member, as applicable, to complete and sign IRS Form 4506-T, Request for Transcript of Tax Return, IRS Form 4506-C, IVES Request for Transcript of Tax Return, or IRS Form 8821, Tax Information Authorization, for the previous two tax years at the time of submission to the Agency. The 4506-T/4506-C/8821 must be used to request full transcripts with all schedules.
Full time students ages 18 and up that are not the applicant, co-applicant, or spouse of an applicant are not required to sign the 4506-T/4506-C/8821 or have transcripts provided.
Guaranteed loans cannot be made to a household that exceeds the applicable adjusted annual income limit. The transcripts provide a quality control measure to ensure all income and asset earnings reported to the IRS have been disclosed to the lender.
Lenders must obtain and review available transcripts prior to loan closing and retain them in their permanent loan file.
Previously unknown/undisclosed income or asset sources that are identified by the transcripts will require additional review by the lender and may render a loan file ineligible. The lender is responsible for requesting tax transcripts in the early stages of the application process. When the lender is unable to obtain transcripts from the IRS for the applicants or required household members, they may document their
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correspondence to and from the IRS in the permanent loan file to support the omission. The loan file will be considered complete when the explanation is documented. Loan closings will not be delayed due to obstacles in obtaining the tax transcripts. 9.4 CALCULATING INCOME FROM ASSETS [7 CFR 3555.152(d)]