Wages earned through employment or income from self-employment are subject to Social Security taxes. While most people think of Social Security as part of the retirement safety net, it also provides income to people who become disabled and are unable to work through Social Security Disability Insurance (SSDI). Mortgage lenders recognize some people receive disability through Social Security and normally allow these people to use this income when qualifying for a mortgage.
Taxability
Mortgage lenders qualify homeowners using their gross monthly income. For homeowners who work a W-2 job or are self-employed, the income used reflects the amount of money earned prior to paying taxes or other benefits. The IRS does not tax Social Security or Social Security disability benefits. Because of this, many mortgage lenders allow Social Security disability benefits to be increased by 125 percent of their base amount when calculating income. This ensures that the home buying dollar for a disabled person equals the home buying dollar for an employed and self-employed person. If the person receiving disability receives $1,000 a month, the lender would consider that $1,250 a month when determining qualification.
Duration
Mortgage lenders want to be sure the income used to qualify is stable and is likely to continue. This is true for Social Security disability as much as it is for any other type of income. Often mortgage lenders require the borrower to have received Social Security disability for at least two years and want to know that it will continue for at least three years after the mortgage closes.
Documentation
Lenders document Social Security disability with a copy of the awards letter from the Social Security Administration. The Social Security Administration normally issues awards letters outlining the amount of benefits on an annual basis. Lenders typically request the most recent annual awards letter when documenting the amount of disability received. Additionally, some lenders may request a letter from the borrower's personal physician documenting that his disability is not likely to end within the next three years. The lender should not ask for details of the disability, only the likelihood the disability will continue.
Other Disability Payments
Sometimes people receiving Social Security disability benefits also receive other disability benefits. The borrower may have a long-term disability policy in place when the disability occurred, or the disability could be a result of others' negligence. Lenders also use this other income under the same basic guidelines as Social Security disability. Allowing disability payments to qualify for mortgages is not limited just to benefits paid by the Social Security Administration.
