Disability benefits sit on a mortgage application the same way a paycheck does. A buyer living on SSDI, a long-term disability policy, VA compensation or a mix of them qualifies through the same debt-to-income ratios as anyone else, and because several of these benefits aren't taxed, they often count for more than the amount that hits your bank account.
Which disability benefits count
- Social Security Disability Insurance (SSDI). It's paid on your own work record, so lenders treat it as continuing. The Social Security and SSI page covers SSDI and SSI side by side.
- Private long-term disability. This comes from an employer group plan or a policy you bought yourself. Fannie Mae asks for the policy or a benefits statement showing your current eligibility, the amount, how often it's paid and any termination or change date, and it sets no minimum history.
- VA disability compensation. It's tax-free, it counts on every program, and it waives the VA funding fee. The VA disability page has the details.
- Short-term disability. These payments usually cover a temporary leave. When they're scheduled to convert into long-term benefits, Fannie Mae qualifies you on the long-term amount.
How much each benefit counts depends on whether it's taxed. Untaxed income gets a gross-up, an increase that puts it on equal footing with wages that have taxes taken out. FHA adds 15% and Conventional adds 25%.
- SSDI is untaxed for most people who live mainly on it. If other income pushes you past the IRS thresholds, only the untaxed part is grossed up.
- Private long-term disability is taxable when your employer paid the premiums. When you paid the premiums yourself with after-tax money, IRS Publication 525 says the benefits aren't taxed, so they qualify for the gross-up.
- VA disability compensation is never taxed.
What the lender can and can't ask
The lender verifies two things: how much you receive and whether the payments have an end date. Your award letter, policy or benefit statement shows both, and bank statements show the deposits arriving. A benefit that stops within three years of your application, such as a policy that ends at 65 for a 63-year-old, generally can't be counted. A periodic review of your case doesn't count as an end date.
The lender can't ask about your diagnosis or require a doctor's letter on how long the disability will last. A fair housing complaint to HUD over exactly that request ended in an agreement in which a national lender committed not to ask applicants relying on disability income for a doctor's letter about the nature, severity or duration of a disability. The CFPB also states that under the Equal Credit Opportunity Act, lenders can't discount or refuse to consider income from public assistance, including SSDI and SSI.
A worked example
Teresa, 49, receives $1,700 a month in SSDI and $2,200 a month from a long-term disability policy she paid for herself, so neither benefit is taxed. Her car and card payments total $200 a month. Here's FHA at a 5.75% rate, with property tax at 0.95% of the price a year (the high end of the 0.74% to 0.95% range QualRate uses for Florida) and homeowners insurance of $283 a month:
| Benefits at face value | Benefits grossed up 15% | |
|---|---|---|
| Qualifying income | $3,900.00 | $4,485.00 |
| Highest FHA price | $222,000 | $261,000 |
| House payment | $1,829.01 | $2,100.61 |
At $261,000 the payment is $1,495.54 in principal and interest on a $256,272.64 loan (which includes the 1.75% upfront mortgage insurance premium), $206.63 in property tax, $283.00 in insurance and $115.44 in monthly mortgage insurance. That's 46.8% of her grossed-up income for housing and 51.3% with her debts, inside FHA's 46.9% and 56.9% limits. The gross-up alone adds $39,000 to her price.
Now change one fact. If Teresa were 63 and her policy ended at 65, the lender couldn't count the $2,200, and her SSDI alone ($1,955 grossed up) would carry only about a $90,000 price. A parent or sibling who co-signs with $2,500 a month in income and $250 in debts brings her back to $258,000.
Program by program
- FHA: Counts SSDI, long-term disability and VA compensation, grosses up the untaxed part 15%, and allows 46.9% for housing and 56.9% total with an automated approval, from a 580 score at 3.5% down.
- Conventional: Counts the same benefits with a 25% gross-up and a 50% total ratio, from a 620 score.
- VA: Counts all three and judges the loan on residual income, the money left each month after the house payment, debts, taxes and upkeep. Veterans receiving disability compensation pay no funding fee.
- USDA: Counts benefits with 29% housing and 41% total ratios. For its household income limit, USDA subtracts $400 when a borrower on the loan has a disability, plus medical and disability assistance costs above 3% of annual income.
When the benefit needs a boost
- Add a co-signer. A parent, sibling or adult child adds income on FHA and Conventional, and a co-signer doesn't go on the title or live in the home. The co-signer calculator shows what they add.
- Buy a 2 to 4 unit home. You live in one unit and 75% of the other units' rent counts as income.
- Keep the cash side small. FHA 100% financing covers the 3.5% down payment with a down payment assistance second, and the seller can pay up to 6% of the price toward closing costs.
- Clear a monthly payment. Paying off a $200 card or car payment adds about $28,000 to an FHA price when the total ratio is what limits you.
Have your award letter and policy statement nearby, then put the monthly amounts into the QualRate calculator with the gross-up added. To have the untaxed portion figured exactly for each program, call AAA Capital Funding at 888-601-8344.