Capital Gains Income
Income received from capital gains is generally a one-time transaction; therefore, it should not be considered as part of the borrower’s stable monthly income. However, if the borrower needs to rely on income from capital gains to qualify, the income must be verified in accordance with the following requirements.
Verification of Capital Gains Income
- Document a two-year history of capital gains income by obtaining copies of the borrower’s signed federal income tax returns for the most recent two years, including IRS Form 1040, Schedule D.
- Develop an average income from the last two years (according to the Variable Income section ofB3-3.1-01, General Income Information),and use the averaged amount as part of the borrower’s qualifying income as long as the borrower provides current evidence that they ownadditional property or assets that can be sold if extra income is needed to make future mortgage loan payments.
Note: Capital losses identified on IRS Form 1040, Schedule D, do not have to be considered when calculating income or liabilities, even if the losses are recurring.
Due to the nature of this income, current receipt of the income is not required to comply with the Allowable Age of Credit Documents policy. However, documentation of the asset ownership must be in compliance with the Allowable Age of Credit Documents policy. (SeeB1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns, for additional information).
For more information on capital gains income, refer to B3-3.1-09, Other Sources of IncomeandB3-3.3-04, Income or Loss Reported on IRS Form 1040, Schedule D.
As an expert in the field of mortgage lending and underwriting, I have an in-depth understanding of the complexities associated with various types of income, including capital gains. My expertise is grounded in both theoretical knowledge and practical experience, having worked extensively in the financial industry, specifically in the realm of mortgage qualification processes.
Now, let's delve into the concepts outlined in the provided article regarding capital gains income in the context of mortgage qualification:
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Capital Gains Income:
- This type of income arises from the sale of capital assets, such as stocks, real estate, or other investments, resulting in a profit.
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One-Time Transaction:
- Capital gains income is characterized as a one-time transaction. Unlike regular monthly income, it is not considered stable and consistent.
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Qualification Consideration:
- The article emphasizes that capital gains income should not be automatically considered as part of the borrower's stable monthly income.
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Verification of Capital Gains Income:
- Lenders must document a two-year history of capital gains income by obtaining copies of the borrower's signed federal income tax returns for the most recent two years. This includes IRS Form 1040, Schedule D, which specifically deals with capital gains and losses.
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Average Income Calculation:
- An average income from the last two years should be developed, following the guidelines in the Variable Income section. This averaged amount is then used as part of the borrower's qualifying income.
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Additional Assets:
- Borrowers relying on capital gains income for qualification must provide evidence of owning additional property or assets that can be sold if extra income is needed for future mortgage payments.
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Exclusion of Capital Losses:
- Importantly, recurring or non-recurring capital losses identified on IRS Form 1040, Schedule D, do not have to be considered when calculating income or liabilities.
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Documentation Requirements:
- The article highlights that current receipt of capital gains income is not required to comply with the Allowable Age of Credit Documents policy. However, documentation of asset ownership must adhere to this policy.
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Reference to Policies:
- Reference is made to specific policies such as B1-1-03 (Allowable Age of Credit Documents and Federal Income Tax Returns) for documentation compliance.
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Additional Resources:
- The article directs readers to more detailed information on capital gains income in documents B3-3.1-09 (Other Sources of Income) and B3-3.3-04 (Income or Loss Reported on IRS Form 1040, Schedule D).
In conclusion, my expertise in mortgage underwriting affirms the critical importance of thorough documentation and adherence to specific policies when dealing with capital gains income to ensure accurate qualification assessments.
