Foreign Income – What, Why, & How to qualify

foreign income

Let’s imagine you got lucky while you were on your vacation to Australia and won $10,000 at the Crown Melbourne Casino and want to use that income to help pay for your mortgage??   ..sorry Charlie!  The foreign income we are going to talk about today is when a citizen earns income from a foreign corporation or government on a regular basis that you want to use to qualify.

One of the most difficult things about foreign income is that there are 180 currencies in the world.  This means it is anyone’s guess what income forms and type of payment might be present in any country.  We take it for granted that everywhere in the world people get paystubs and file forms reporting to the government what they earned.  The facts show that much of the world is a cash economy.  So what will your borrower have?  Paystubs…maybe… in English… I doubt it!!

We know that the 1040’s, W-2’s, and Schedule C’s are based on US tax returns, so you won’t find those on foreign income earners.  BUT the common denominator (and guideline requirement) is these borrowers must have a US Tax Returns\ with form 2555 Foreign Earned Income.   Here is a link to this 2555 form, it is something you will need to see to learn how to complete the steps below!

How to qualify foreign income

Here are the steps to confirm eligibility and calculate foreign income to qualify your borrower

Step 1

Confirm the borrower is a US Citizen, Legal Alien, or legally present in the United States.  This is accomplished for the most part by the borrower providing their tax returns for review.

One question that comes up often is lenders trying to use non tax filing borrowers who work for foreign entities and want to use their income. This type of income is not acceptable for qualification BUT may be acceptable to verify a two-year work history, bottom line no 2555 no income qualification!

Step 2

Confirm that foreign income has been reported for the most recent two tax years.


Step 3

Find and review the IRS for 2555 to determine if the borrower has a job or is self-employed.  Based on this select either Step 4 for employed borrowers or Step 4 for Self-Employed borrowers below.

form 2555



Step 4 – Employed

If your borrower shows they are employed in question 5, you will need to get similar documents as you would for any employed borrower.  This would include a current pay document that shows what the borrower earns in rate (hourly, salary, etc) and what their YTD total is.  Keep in mind the foreign company may not have a VOE and will NOT have W-2’s (that is US only), this means you need to be open to documents provided.

To calculate the income get a recent pay document and confirm what if any form of salary they might be getting.  Then compare the tax returns for the last two years for consistency.  The safe route is to only use the average the income earned from the last two years off the tax returns.  I am not saying that is the only route, but is the route I use 95% of the time.  Using the pay documents depends on how confident you feel about the YTD pay document and if you can confirm that income.  If the pay document states, they earn $48,000 year and the 2018 returns show that last year the pay listed on line 19 is within 10%.  I would accept the current pay document with the support of a bank statement showing the net deposit.

Summary – Employed Foreign Income

A quick summary on the lines below for employed borrowers

19 – Use this line like a W-2, to determine the “gross” on what they earned last year

21C – Only use that line if you can follow the standard rules required to use car allowances

22A – Use this line if the “extra” cost of living is confirmed in the YTD pay document, list as base pay

22E – Use this line only if you can follow the standard rules required to use housing income

foreign earned income


Step 4 – Self Employed

If your borrower shows self in box 5c, you will not need any more income documents than just the tax returns and Form 2555 to calculate income.  As we have stated, the typical tax forms you see for self employment (Sch C, E, 1065, etc) are US based concepts and your borrower won’t have them for their business in a different country. This also means you will ONLY see the gross reported, so there is NO cash flow adjustments needed….so what you see is what you get!  My suggestion is to use the Schedule C in UberWriter (or any 1084 /91 income form you use) to calculate and support the income.

Summary – Self Employed Foreign Income

A quick summary on the lines below for self-employed borrowers

Line 20 A/B – Put this in line 31 of the Schedule C calculator

The rest of the lines are possible to receive, but in my experience most SE people do not get the benefits listed in line 21-23.  But if they do receive those forms of income, add them to line 31 in a Sch C income calculator following the same rules as I went over for employed borrowers on the 2555 form.

allowable share of foreign income

Thanks for taking a look at this blog and that helps explain more in detail how to get the correct foreign income.  If you need help with any other income, sign up for my blog and underwriting training to learn in depth all the trick of the trade for underwriting.

6 Responses

  1. Hi Michael…
    Our loan is being denied because lender is saying we cannot use borrowers income if they are self-employed. Borrower is a US Citizen who is self employed in New Zealand. They file US Taxes and Form 2555. Can you direct me to the AllRegs or Fannie Mae Guide that will support my use of their income?

    1. Hi Rhodlynn
      My best advice to print this blog and provide it to your lender, the rule states foreign income reported…and 2555 shows both self-employed and employed. The guidelines do not say “employed or self-employed” only they just say foreign income

  2. Good morning!

    Is the 2555 still a tool if the borrower uses foreign pension/disability income on the 1040, Schedule 1, Line 21 as ‘Additional Income’ labeled as ‘Disability Pension’?

  3. Hi Michael, Did the guides change recently for Fannie and Freddie? It seems to state Foreign income is acceptable if from a Foreign entity or Foreign Government. I guess it doesn’t explicitly state No Self Employed?

  4. I think we can use 1116 income too or some borrowers file 2555 and 1116 concurrently. Any experience using 1116 as well?

  5. Hi Michael, I know this is somewhat of an aged thread but I wanted to get your feedback on Form 2555 specifically section 9 which is for the tax payers tax home. If the borrower has a foreign address listed in this section but on the 1003 they’ve declared a US based address for their 2 year housing history, does Fannie or Freddie look at this to determine the applicants primary residence? I have a client that works for a Canadian based company, owns a primary residence in FL which he declared as his residence for the 2 year housing history but underwriting is kicking back saying that Fannie will look at this section of the 2555 and say this is the address that needs to be entered for the address history on the 1003. Obviously DU and LPA cannot read foreign addresses and therefore would kick this to a manual which we won’t do on agency Fannie/Freddie – I know most lenders won’t do a manual on conforming due the additional reps/warrants that come with it.

Leave a Reply

Your email address will not be published. Required fields are marked *