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Qualify for a Mortgage with IHSS in Los Angeles, California

Q: Why do mortgage lenders often reject or question IHSS income?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: How is non-taxable IHSS income calculated for a mortgage application?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: What specific documents are needed to verify IHSS income for a home loan?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: How long must I have been receiving IHSS payments to use them for a mortgage?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: Can I combine my IHSS income with a traditional W-2 job on a mortgage application?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: How do FHA and conventional loan guidelines for IHSS income differ?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: What should I ask a loan officer to ensure they understand how to handle IHSS income?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

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David Ghazaryan

Owner / Broker / Banker

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TL;DR

This guide provides essential information for using In-Home Supportive Services (IHSS) income to qualify for a mortgage. Key takeaways include:

Understanding Lender Hesitancy: Learn the primary reasons lenders often misinterpret or reject non-taxable IHSS income, which typically relate to its absence on tax returns and concerns about its long-term stability.
Proper Calculation and Documentation: Discover the 'grossing up' method used to increase the qualifying value of your IHSS income and the specific documents required, such as the Notice of Action and a critical Letter of Continuance.
Loan Program Guidelines: Understand how different loan programs, like FHA and conventional loans, handle IHSS income and why one might be a better fit for your situation.

Why Lenders Often Reject IHSS Income for a Mortgage

For many parents in Los Angeles County caring for medically fragile children, In-Home Supportive Services (IHSS) income is a critical financial support system. However, when it comes to applying for a mortgage, this income source is frequently met with skepticism or outright rejection from lenders. The primary reason is a fundamental misunderstanding of its nature.

First, IHSS income is non-taxable. Traditional underwriting software and processes are built around W-2s and tax returns. When income doesn't appear on a tax return, it can raise an immediate red flag. Lenders see it as undocumented, even though it's perfectly legal and stable. They are often unsure how to properly calculate its value relative to taxable income.

Second, the income is for the care of a family member. From an underwriter's perspective, this can seem less stable than a traditional job. They may question the continuance of the income. What happens if the care is no longer needed? Without proper documentation proving the long-term nature of the child's needs, lenders default to a conservative stance and deny the income's use for qualification.

Calculating Non-Taxable Income for Mortgage Qualification in Los Angeles

Because IHSS income is not taxed, the net amount you receive is equivalent to a higher gross salary from a traditional job. Experienced mortgage lenders understand this and use a method called 'grossing up' to account for the difference. This process increases the value of your non-taxable income on paper, helping you qualify for a larger loan amount.

Fannie Mae, Freddie Mac, and the FHA all permit this practice. The allowable gross-up percentage is determined by agency guidelines, but is often standardized by lenders at 15% or 25%. (The data, information, or policy mentioned here may vary over time.)

Here’s a practical example of how it works:

Monthly IHSS Income Received: $4,000 (non-taxable)
Lender's Gross-Up Percentage: 25%
Calculation: $4,000 x 1.25 = $5,000

In this scenario, the lender will use $5,000 as your qualifying monthly income from IHSS. This additional $1,000 per month can significantly improve your debt-to-income (DTI) ratio, which is a key factor in mortgage approval.

Calculating non-taxable income for a mortgage application.

Essential County Paperwork to Document Your IHSS Income

Proper documentation is the key to getting your IHSS income approved. Underwriters need an official and verifiable paper trail that proves the income's amount, consistency, and expected duration. Simply showing bank statements is not enough. To prepare for your application in cities like Los Angeles or Anaheim, you must gather the following items:

Notice of Action (NOA) Letters: These are official documents from your county's Social Services agency. You should provide the most recent NOA and any others from the past two years to show a history of payments.
Pay Stubs: The state of California issues pay stubs or payment records for IHSS providers. Collect a complete history for the last 12 to 24 months.
Proof of Receipt: Provide 12-24 months of bank statements showing the consistent, timely deposit of IHSS funds into your account.
Letter of Continuance: This is arguably the most critical document. You must request a letter from the county agency that administers your IHSS payments. This letter should state that the income is non-taxable and is reasonably expected to continue for a minimum of three years. The three-year benchmark is a standard requirement for all qualifying income in the mortgage industry.

Understanding Income Seasoning Requirements for IHSS Payments

'Seasoning' refers to the length of time you have been receiving a particular type of income. Lenders need to see a stable and reliable history before they will count it toward your mortgage qualification. For IHSS income, you generally need to demonstrate a minimum 12-month history of consistent receipt.

However, many lenders, especially for conventional loans, will prefer to see a 24-month history. This longer period provides a stronger case for the income's stability and predictability. If you have only been receiving IHSS payments for a few months, you will likely need to wait until you have crossed the one-year threshold before applying for a mortgage.

A family considering homeownership with IHSS income.

For a homebuyer in Long Beach, for example, an underwriter will look at the county pay stubs and corresponding bank statements for the last two years. They will check for any gaps in payment or significant fluctuations in the amount. A clean, consistent 24-month record is the gold standard for getting this income approved without issue.

Combining IHSS Payments with W-2 Income for a Stronger Application

Yes, you can and absolutely should combine your IHSS income with any other traditional employment income, such as from a W-2 job. This creates a much stronger financial profile and significantly increases your purchasing power. Lenders will evaluate each income stream separately and then add them together to determine your total qualifying income.

Let’s look at a combined income scenario for a family in Los Angeles:

Applicant's W-2 Monthly Gross Income: $5,000
Spouse's IHSS Monthly Income: $3,500 (non-taxable)

First, the lender will gross up the IHSS income:

$3,500 x 1.25 = $4,375 (qualifying IHSS income)

Next, they will combine it with the W-2 income:

$5,000 (W-2) + $4,375 (Grossed-Up IHSS) = $9,375

Your total qualifying monthly income is $9,375. Without grossing up the IHSS income, your total would only be $8,500. That extra $875 per month in qualifying power can be the difference between affording a home in your desired neighborhood and being priced out.

Specific FHA and Conventional Loan Guidelines for IHSS Income

Different loan programs have slightly different rules for handling non-traditional income sources like IHSS. Understanding these distinctions can help you and your loan officer choose the right path.

FHA Loan Rules for IHSS

The Federal Housing Administration (FHA) is often the most flexible option for borrowers with IHSS income. FHA guidelines, outlined in the HUD Handbook 4000.1, explicitly permit the grossing up of verified non-taxable income. (The data, information, or policy mentioned here may vary over time.)

The key for FHA approval is documenting the three-year continuance. The letter from the county agency is non-negotiable. FHA underwriters are trained to look for this specific verification. As long as your documentation is complete and shows a stable history, FHA is an excellent route for IHSS recipients.

Conventional Loan Rules (Fannie Mae & Freddie Mac)

Conventional loans, which are those that conform to the guidelines set by Fannie Mae and Freddie Mac, can also be used with IHSS income. Both agencies allow for the grossing up of non-taxable income, though the specific percentage used can vary by lender. (The data, information, or policy mentioned here may vary over time.)

The challenge with conventional loans is that the automated underwriting systems (AUS) they use may not immediately recognize IHSS income. This can lead to an initial automated denial. In such cases, your loan officer must be experienced enough to request a manual underwrite. During a manual underwrite, a human underwriter reviews all your documentation and can apply the gross-up rule correctly, potentially leading to an approval.

How to Explain Your IHSS Income to a Loan Officer in Long Beach

Your initial conversation with a loan officer is crucial. You need to quickly determine if they have the experience to handle your specific situation. Don't be shy about asking direct questions. Use these talking points to guide the conversation:

Start by clearly stating your income source: 'A significant portion of my qualifying income comes from California's In-Home Supportive Services program, which is non-taxable.'
Establish its history: 'I have been receiving these payments consistently for the past [Number] years.'
Confirm you have the proof: 'I can provide all the necessary documentation, including the county-issued Notice of Action, pay stubs, bank statements, and a letter confirming the income is non-taxable and will continue.'
Test their knowledge: 'Are you familiar with the process of grossing up non-taxable income according to FHA or Fannie Mae guidelines?'

If the loan officer seems confused, hesitant, or unfamiliar with these terms, it's a clear sign that they are not the right fit for you. It's better to find an expert who understands the nuances of your financial situation from the start. Navigating a mortgage application with IHSS income requires a loan officer who understands the specific documentation and guidelines. If you are struggling to find a lender who will correctly evaluate your income, connect with a mortgage advisor who specializes in complex income scenarios to ensure your application is structured for success.

Understanding how to properly document and present your IHSS income is the first step toward homeownership. If you're ready to move forward with a team that understands your unique financial situation, we encourage you to apply now and get a clear, supportive assessment of your mortgage options.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.