For most people, this is not a popular topic. But, for ministers and pastors looking to build, refinance, or buy a home, it sure is. First of all, pastoral income can vary widely. Furthermore, many lenders do not understand how to count clergy housing allowance as income. Therefore, finding a mortgage lender who understands clergy income may be tough. But, we have good news! First, pastoral housing allowance can be counted. Plus, grossing up the income to a higher amount is even possible. So, let’s discuss how to approve you for VA, FHA, USDA, or conventional home loans. Plus, count your housing allowance!
Types of Clergy Income
Like mentioned above, pastors, ministers, and priests are paid in many ways and levels. Primarily, we see the income divided into two types: self employed sole proprietorship or as a W2 wage earner. But, then it can vary greatly after that.
As the employer, a church may provide an employee package that includes one or more variations of income. Some are taxable and others nontaxable.
Clergy Income Types
- Housing allowance
- Auto allowance
- Expense reimbursement
Obviously, it is key to understand how each income affects your bottom line net pay. But, it is also important to understand how each can impact your home loan qualification.
Expense reimbursement is just paying back money based on actual expenses incurred by the pastor. Thus, it is not income. Insurance reimbursement is treated the same.
Can I Count an Auto Allowance as Income?
It is pretty common for clergy to receive an auto allowance as part of their church compensation package. In order to count an auto allowance as income, it must be stable. For instance, Fannie Mae conventional loans consider stable as receiving the income for the past 2 years. Proving the income may include the last 24 months of cancelled checks. If received within a paycheck, providing the last 24 could work. So if the income is documented, it may be counted. Although, any car loan or lease is considered in the debt to income ratio too.
What is a Clergy Housing Allowance
A housing allowance is often a common and critical portion of pastoral income. It is a form of income to fully pay or at least offset a part of the expense to own or rent a home. The largest benefit of the income is that it is nontaxable income. Regretfully, clergy have a difficult time using this nontaxable income in getting approved for a mortgage loan. Often, there is the sound of frustration and exhaustion when we receive calls from pastors, priests, or ministers.
Clergy Mortgage Frustration
Typically, pastors fall into this process: Decide to buy a home, choose a lender, get pre-qualified, get under contract for a home, provide income documentation, underwriting does not count the housing allowance because it does not report on tax returns, and then the pastor starts looking online for answers. That’s where we come in!
How are Clergy Paid? Let Me Count the Ways!
The following are some common ways we have seen a pastors income broken down.
- W2 salary and separate check for housing allowance
- All housing allowance
- W2 only (although this is rare because the housing allowance is so beneficial)
- One paycheck showing W2 salary with taxes coming out plus housing allowance
- W2 salary without taxes coming out plus housing allowance
- Housing allowance paid directly to the mortgage company or landlord
- Paying the pastor as a contract employee, so all income is reported as self employed – watch out for write-offs which lower income in this case
Clergy Housing Allowance Solutions
Now, I will be the first to tell you that not all pastoral income set ups work. It’s almost like no two are the same. So, right up-front we will dig to discover the actual income breakdown. Simultaneously, we are looking for solutions to make a mortgage work. But when housing allowance is involved and can be documented, we can count it. Hint: Even though you may have been told it cannot be counted because it doesn’t report on income taxes, it usually can be!
Grossing Up Clergy Housing Allowance!
Not only can it be counted as income, it can also be grossed up to a higher figure. Wait, how can it go from not being counted as income to being able to use an even higher figure? When it comes to wage earners qualifying for a mortgage loan, lenders use gross income. Which is income prior to income taxes coming out. Although, borrowers who receive nontaxable income are at a disadvantage.
UNTIL, this income is put on equal ground by increasing it. Now, the percentage that the nontaxable pastoral housing allowance is grossed up depends on a couple of factors. First is the loan program as each has different requirements. Furthermore, the nontaxable income percentage compared to the overall income may come into play. VA loans are a good example of this.
When Pastoral Housing Allowance is Taxable
Also, a housing allowance may start the year as nontaxable. But at year end, it may exceed the actual housing expense. When this happens, the excess is now taxable income.
How to Document Pastoral Housing Allowance & Other Clergy Income
We believe the best way buy, build, or refinance a home is to provide documentation up-front for accurate qualification. Why not use the real income and actual documentation which the underwriters will eventually review anyway? Right? So, here is a list of required items to accurately calculate a pastor’s income.
Pastoral Income Documentation List
- Last two years W2’s from all sources of income
- Last two years tax returns including all schedules
- Most recent 30 days of pay stubs
- Canceled checks for pastoral housing allowance (typically last 60 days)
- Pastor income breakdown letter
Pastoral Housing Allowance Letter
A key piece of documentation for a pastor’s income is the pastoral housing allowance letter. It will provide us with the breakdown of the clergy income and there are specific requirements for preparing this clergy income breakdown.
- Must be on church letterhead
- An authorized representative of the church must sign (not a borrower)
- Break down salary, clergy housing allowance, insurance, retirement, auto allowance, reimbursements, and other
Even though all income sources are added to the letter, not all sources are allowed. Also, for the initial conversation, the pastoral housing allowance letter is not needed. But, it is required for processing and underwriting.
Of course, just having enough income does not guarantee approval. There’s still credit and property requirements, among other criteria. All other income in addition to clergy housing allowance is treated like any other mortgage scenario.
Clergy Income for VA Loans
VA loans are a great option for military Veterans who are now pastors. Just like active military who receive a housing allowance, pastors do too. It’s just not a standardized amount like the military pays. But, clergy who use a VA loan have benefits such as…
- No money down purchase with full entitlement (no limits start Jan 1, 2020)
- Cash out refinance up to 90% of appraised value
- Waived VA funding fee for disabled Veterans (and purple heart recipients starting Jan 1, 2020)
- Construction and VA perm loan to 100% of the “as completed” value to build a new home
- Flexible guidelines for borrowers who have student loan debt
- Have multiple VA loans at once & seller can pay off debt for buyer
- No monthly PMI even though borrowing over 80% of the price / value
- No money down manufactured, modular, or condos as well
- Buy a home using a VA loan even though the Veteran lives a distance from the home
USDA Loans for Clergy
Another very beneficial no money down purchase loan is USDA Rural Development loans. This loan helps middle and lower income families buy a home in most of the U.S. Although, there are USDA household income limits and there is a USDA property eligibility map that buyers and properties must meet. Contrary to it’s name, USDA is not just for homes way out in the country. Plus, there are no loan limits. So, if the buyer and property are eligible, the skies the limit. We would highly recommend that you check into this wonderful home buying product.
Pastor Benefits of a Conventional Loan
Fannie Mae and Freddie Mac conventional loans offer financing for primary, secondary, and rental properties. When buying a primary residence, don’t forget conventional loans allow as little as 3% down payment, has flexible mortgage insurance options, and has a lot of flexible underwriting guidelines. Buying a second home which is occupied at least 2 weeks of the year with 10% down payment. Plus financing investment property purchase up to 85% of the sales price.
Furthermore, conventional loans work wonders for buying condos too even if a second home or investment property. We even provide conventional financing for manufactured and modular homes. Conventional loans work for refinancing. We even offer a one-time close construction to perm loan up to 95% on primary residence and 90% on second homes. So, there are a ton of great ways that conventional loans combine well with clergy housing allowance and other income.
Clergy Housing Allowance for FHA Loans
When it comes to flexibility, FHA is a leader in many ways. These benefits include higher debt ratios, lower credit scores, low down payment, manufactured homes, condos, gift of equity, allows down payment assistance (so do others), and much more. Like the other home loans, FHA loans work very well for clergy income.
As with all of our articles, this is not tax advice and a tax professional should be consulted for such. But, when it comes to figuring minister, priest, and pastoral income for a mortgage loan, contact us. We will do our best to count every bit of income possible to help you qualify for your home loan!