Disability income might seem like income to you, but in the eyes of the lender, it may not. There are many factors at play when you don’t have straightforward income from your employment. The circumstances surrounding your injury and the likelihood of continued employment/income are what the lender needs to understand. Without these important details, the lender may not be able to qualify you for a refinance based on the money you receive from your injury. Typically, the more information and stability you can provide, the more likely it is you will gain approval.
The Type of Disability Income
One of the most important things the lender cares about is the type of disability income you receive. Is it short-term or long-term? Here are the differences:
- Short-term disability – This is income you receive to cover a short period of time you cannot work. You have an intended date of return to employment given to you by your doctor. For example, if you fell and hurt your back and the doctor required you off work for 6 months, this constitutes short-term disability.
- Long-term disability – Another word for this long-term disability could be permanent disability. In this scenario, there is no projected date you will return to work. The doctor determined your recovery will not be strong enough for you to return to your previous employment.
Lenders need to know the type of disability payments you receive because there is a difference in how you qualify. For example, if you are on short-term disability, the lender can’t use the money you bring in for your injury as qualifying income. If this income will change in the next few months or even within the year, it is not suitable for qualifying purposes. However, if your return date is set to say 6 months down the road, the lender may have a hard time using your standard employment income for qualification purposes as well. This leaves you in a sticky situation.
If you have long-term or permanent disability income, this money is easier to use for qualification purposes. As long as you can prove the money you receive will continue for the next 36 months, at a minimum, you can use it for qualifying purposes. This is a more stable income in the eyes of the lender because they can see your potential income for the next 3 years.
Proving Your Disability
As is the case for any other type of income, you need plenty of evidence of what you receive. If you were to provide evidence of your standard employment income, you would provide your paystubs, W-2s, and possibly tax returns. Disability income is a little different. You don’t have paystubs with proof of dates you worked. Instead, you may have proof of receipt in your bank account. This is not enough for a lender to approve you for a loan, though. They need further proof of the reason you receive the income. Typically, this means providing any of the following:
- Letter of intent to return to work from your employer
- Clearance of ability to return to work from your doctor
- Proof of receipt of the income, with your bank statement and/or a letter from the issuer
- Awards letter for permanent disability
The lender needs to see from all angles that your income is legitimate. Not only that, but they need to see that the income will continue. As stated above, if your disability income only continues for 6 months, no lender will use it for qualifying purposes. They will need to use your income from employment, but if your return date is too far off, they may require you to wait until you are closer to your return date to ensure you do return to work.
If you are on permanent disability, you can provide the same documents to prove receipt of the income. Your bank statements, a letter from the issuer, or your tax returns usually suffice. You also need to provide the awards letter or proof of continuance, though. Your issuer should be able to provide you with a letter stating the date your disability payments began and the date they expect to pay them through. If this date is at least 3 years from now, the lender can use the income for qualifying purposes.
The Verification of Employment
One thing you have on your side when dealing with short-term disability, however, is the Verification of Employment. This is something many lenders do several times during the loan process. They verify your employment initially to ensure what you stated is true. They sometimes verify it again before you close to confirm that nothing changed during the process. On this Verification of Employment form, the lender confirms the probability of continued employment. Lenders use this to determine whether your income is too risky or not.
Not Every Lender Will Refinance with Disability Income
Keep in mind that not every lender deals with disability income. You may have to shop around a little to find a lender willing to do so. The capability of the refinance lies in your hands, though. You have to provide the lender with a stable circumstance. If your ability to return to work is still up in the air, you do not provide a stable scenario. The lender does not know if you will return to work or end up on permanent disability. There could be a stark difference in your income depending on the outcome of the situation. If you return to work, your income will likely be higher than if you had to take permanent disability. Lenders need solid proof of what may happen to qualify you for a loan.
If you have disability income, make sure to get all of your ducks in a row before applying for a refinance. The more sure you are of your future – either working or not working – the easier the refinance process will be. As long as the lender can determine your likely income for the next 3 years, your ability to refinance will go much smoother in the end.