Retired borrowers or those receiving income from structured annuity products often use this income to qualify for a mortgage. The rules for how annuity income is counted vary by program and require specific documentation.
Agency Treatment (Fannie Mae and Freddie Mac)
Fannie Mae and Freddie Mac allow retirement income including annuity distributions if it is stable and has a defined continuation period. For annuity income, the lender must document the amount and frequency of distributions (typically via the award letter or annuity statement) and confirm the income is expected to continue for at least 3 years. If the annuity has a termination date within 3 years, it generally cannot be counted for qualifying.
FHA Treatment
FHA allows annuity income with documentation showing the income is stable, predictable, and likely to continue. FHA does not use the strict 3-year continuance test the same way as conventional; however, the income must be verified via award letter, bank statements, or tax returns for the most recent 2 years.
Tax Implications in Income Calculation
Non-qualified annuity distributions include a return of principal component that is not taxable. Lenders must identify whether the distribution is gross (pre-tax) or net, and whether gross-up for taxes applies. Qualified annuity distributions (from a qualified retirement plan) are fully taxable and no gross-up applies. Misidentifying which type is being documented is a common underwriting error.
Non-QM Asset Depletion Alternative
For borrowers whose annuity income will not meet the continuance test, non-QM lenders offer asset depletion programs where qualified assets (including annuity cash value) are divided over a defined period (often 60-120 months) and treated as imputed monthly income.
Aria on vicariointel.com can walk through annuity income qualification for a specific borrower scenario, including which program applies and what documentation is needed.
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