Can Long Term Disability Income Be Used to Qualify for a Mortgage?

Long term disability income can be qualifying income

A borrower receiving long term disability benefits doesn't automatically need employment income to qualify for a conventional mortgage. Fannie Mae permits long term disability income to be used when the lender can document the borrower’s eligibility, payment amount and benefit terms.

This article is about private or employer sponsored long term disability income. Social Security disability is documented under the Social Security rules, and short term disability tied to a temporary leave is handled differently.

There's no blanket minimum receipt history under the Fannie Mae rule

Fannie Mae’s current long term disability guidance doesn't impose a minimum history of receipt. That can be important for someone who has recently transitioned onto long term benefits and hasn't collected them for one or two years.

The lender still needs enough documentation to establish the amount, frequency, current eligibility and any contractual termination or modification date.

The benefit statement matters more than a bank deposit by itself

The lender must obtain the disability policy or a benefits statement from the payer, such as an insurance company, employer, or other qualified disinterested party. The document should establish the borrower’s eligibility, the amount and frequency of the benefit, and whether the benefit is scheduled to end or change.

A bank statement showing a monthly deposit can help demonstrate receipt, but it doesn't explain the contractual terms of the benefit. Underwriting needs both the money and the reason the money is expected to be available.

At least one payment must be expected by the first mortgage payment date

Fannie Mae requires evidence that you will receive at least one long term disability payment on or before the first payment due date of the new mortgage. That timing detail can matter when benefits have been approved but haven't yet started.

Continuance is usually straightforward unless the documents show a reason for concern

Fannie Mae doesn't generally require the lender to prove a specific three year continuance period for long term disability income unless there is reason to believe the income may not continue. A routine reevaluation of disability benefits isn't, by itself, treated as evidence that the income will end.

If the policy clearly states that benefits terminate on a specific date or reduce materially, the lender has to underwrite the income that is actually expected to remain available.

Example: short term benefits will step down to long term benefits

Assume a borrower currently receives $6,000 per month in short term disability, but the policy states that the payment will convert to $4,500 per month in long term disability within the next year. Under Fannie Mae’s rule, the lender should qualify using the lower long term amount when the reduction will occur within the next three years.

Using the temporary $6,000 amount would overstate the income supporting a 30 year mortgage.

Tax treatment may affect the usable amount

Some disability benefits are taxable and some aren't, depending on how the insurance premiums were paid and the structure of the benefit. Nontaxable income may sometimes be grossed up under applicable mortgage rules, but that should be supported by documentation rather than assumed.

You should provide the benefit statement and, when needed, evidence of tax treatment so the lender can determine the correct qualifying amount.

What if you also have Social Security disability?

Multiple income sources can be combined if each source independently meets its documentation requirements. You may receive a private long term disability benefit and Social Security disability at the same time. The lender should document each source under the rule that applies to that source rather than lumping both payments into a generic “disability income” category.

Common problems to solve early

• The award or benefit letter doesn't clearly state the payment amount or frequency.
• The benefit is approved but payments won't start by the required time.
• The current short term payment is higher than the future long term payment.
• The policy includes a contractual termination or reduction date.
• The borrower assumes a benefit is nontaxable without documentation.
• The lender is given only bank statements and not the disability policy or benefits statement.

Bottom line

Long term disability income can be strong qualifying income because it doesn't require a two year receipt history under Fannie Mae’s current rule. The key is documenting what the benefit actually pays, when it starts, and whether the policy contains a future reduction or termination that changes the sustainable monthly amount.