Can you use settlement income to qualify for a mortgage?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

According to standard mortgage guidelines, settlement income must continue for at least three years from the date of the loan application to be used to qualify for a mortgage.  For example, if you submit your application on December 1st, 2020, your settlement income is required to continue until December 2023. When you apply for the mortgage, lenders request a copy of your settlement documents to confirm both the amount and duration of the income.

To determine the mortgage you qualify for, lenders add your verifiable settlement income to any other sources of income you receive such as from a job, retirement or investment account or social security.  Lenders also factor in monthly expenses for debts such as credit cards and car, personal and student loans to assess the loan you are eligible for. 

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the size mortgage you can afford based on your settlement income

It is also important to understand how lenders treat structured settlements when the monthly income is expected to decline or end in the future.  For example, you may receive $2,500 in monthly income for the next five years and then then amount is reduced by 50% or eliminated after five years.

If your settlement income is expected to continue at a specific level for at least three years, the lender is permitted to use that income to approve you for a mortgage, even if the income is expected to change or decrease after three years. Lenders can also decide to apply their own policy and use the lower future income figure -- even if you expect to receive the higher income for longer than three years -- so you should check with the lender to understand their guidelines before you apply for the mortgage.

We should also highlight that just because you qualify for a certain loan amount does not mean you need to obtain a mortgage of that size. You may be more comfortable with a smaller loan, especially if your monthly settlement income is expected to decrease in the future, and it is certainly your right to choose the mortgage amount that works best for you. 

The table below shows mortgage terms for leading lenders in your area.  We recommend that you contact multiple lenders to confirm their requirements for including settlement income in your loan application, as guidelines vary.  Shopping lenders also enables you to find the mortgage that is right for you.

Sources

"B3-3.1-09, Other Sources of Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, October 2 2019.  Web.