Disability benefits are a vital part of many Americans' lives. They provide much-needed financial assistance to those who are unable to work due to a disability. Disability benefits can also be used to qualify for a home mortgage. In this blog post, we will discuss everything you need to know about using disability benefits income to qualify for a home mortgage. We will cover the different types of disability benefits, how they are calculated, and how they impact your ability to get a mortgage. So, whether you are just starting your search for a new home or you are already in the process of applying for a mortgage, this blog post is for you!
Yes, you sure can. Whether these disability benefits come from your employer with (STD) Short Term Disability 3-6 months, or Long Term Disability (LTD) with no expiration, this is qualifying income that can be used for a mortgage.
Conversely, if you are a Veteran with a Disability, this income is considered tax free, so you can actually gross up this disability income 125% to help you qualify for more of a home.
This also does apply to (SSDI), which is Social Security Disability Income, one of the most common sources of federal aid for disabled people. As long as this income is deemed non-taxable, you can gross up the monthly income by 125%.
An example of this would be an individual receiving long-term (SSDI) Social Security Disability income that would be received on at least a 3-year continuance. Let's say that an individual is receiving $2000 per month and is receiving this income as non-taxable. Most lenders will be able to then add 125% on top of the $2000 to help them qualify for more of a home. That would equate to a $2500 qualifying income, which means recipients of this benefit are unaware of it.
This goes for any non-taxable income from any source for disability benefits.
What Are the Challenges of Getting a Mortgage & When Your Income Comes from These Sources?
The challenges of getting a mortgage loan when your income comes from these sources are mainly when dealing with (STD), and Short Term Disability. Because this source of disability income is only short term at 3-6 months, it will end at some point by either completely stopping, or being converted to (LTD) Long Term Disability from your employer.
An example of this would be an individual who got into a car accident, and whose salary was $80,000 a year, which is around $6666.67 gross a month. The employer issues (STD), Short Term Disability at 80% of the monthly salary up to 6 months, which is $5333. It is later found out the individual has more serious bodily issues from the accident, and cannot go back to work for at least 1 year. The (LTD) Long Term Disability is now reduced to 60% of the normal salary until the employee is able to return to work. Now the monthly salary is reduced to $4000. A complete 40% drop in qualifying income if this individual was in the process of buying a home.
Other challenges can be around continuance. If the disability benefit does not continue for at least 3 years or more, this will be a challenge with most lenders in granting that income as qualifying for when purchasing a home.
What Can Borrowers Do If They're Worried Their Income Isn't Sufficient to Get Approved for a Mortgage?
If borrowers are worried their income is not sufficient they should have great records and ask lots of questions to their lender, about being fully qualified to the highest dollar. Record keeping would include:
Disability Award Letter from Employer, Disability Award Letter from VA, or Disability Award Letter from the Social Security Administration for (SSDI) and (SSI).
Speaking with your employer Human Resources or benefits department will be helpful, as these appointed people can help you within your organization find out all of the important benefits of your disability plan.
All disability award letters will show the monthly benefit amount, and the continuance, and you will be able to determine whether this type of income is taxable or non-taxable by speaking with your lender. They should be able to gross up all non-taxable disability income by 125% monthly. This is very important, especially if your debt to income ratio is teetering on the side of the loan not being approved.
That extra 25% is essential!
If you have any more questions on this topic or are interested in learning more, please feel free to contact me directly. I would be happy to help!
About the Author
Brian Quigley has been in the Denver mortgage industry since 2003. Customer satisfaction has been his top priority while guiding clients through the home loan qualification process. He is proficient in all types of mortgage financing including FHA/VA, Conventional, USDA, Jumbo, Portfolio, 1031 Exchanges, Reverse Mortgages, Refinancing, Construction loans, and FHA 203K loans.