Can payments I receive on a note count as income for a mortgage?

What kind of income is this?

HUD's Handbook 4000.1 calls it Notes Receivable Income: money you receive as the holder of a promissory note. One example is selling a home or land and letting the buyer pay you over time, instead of the buyer getting a bank loan.

What will the lender ask for?

• A copy of the note, showing the payment amount and how long payments last.
• Proof you received the payments for the most recent 12 months: bank statements, canceled checks, deposit records or tax returns.
• Evidence the payments continue for at least three years. Fannie Mae counts from the application date; FHA looks at the first three years of the new mortgage.

How is the income figured?

Fannie Mae's Selling Guide (B3-3.4-11) wants full, regular and on-time payments over the last 12 months and uses the documented monthly amount. Payments on a note signed within the past 12 months can't be used as stable income, however long the note runs. FHA uses the current amount if payments are steady, or the average of the past year if they vary.

Tips if you hold a note

• Have the buyer pay by check or electronic transfer into one account, so every payment is easy to prove.
• Keep the signed note and any amendments together.
• If the buyer plans to pay you off early, the income may not last long enough to count.

On the other side of the deal, see refinancing out of a land contract or owner financing.