"Do the Payments I Receive on a Seller-Financed Note Count as Income for My Next Home?"

On the first of the month a deposit lands in your checking account, the same amount it was last month and the month before. It comes from the family who bought your old rental, or the lot you sold, or the home you moved out of two years ago. You carried the financing when you sold, so you hold the note, and every month they pay you the way you once paid a bank. Now you are the one shopping for a home, and the lender wants to know what you earn.

Payments you receive on a note from a property you sold and financed can count as qualifying income for your next mortgage. You need at least twelve months of receiving them, and the note needs at least three years left to run. You prove it with a copy of the note and twelve months of bank statements or canceled checks showing full, regular, on-time payments.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, NMLS #483943, through C2 Financial Corporation. Fannie Mae, Freddie Mac, FHA and VA each have their own words for this kind of income, and all four are quoted and linked below so you can read what the underwriter reads.

What does the lender call these payments?

In underwriting, your note is "notes receivable income." A note receivable is a written promise that somebody will pay you, and you hold the right to receive it. When you sold the property and let the buyer pay you over time instead of sending them to a bank, you became their lender.

Why lenders want two years of everything explains the general rule for income history. Notes receivable is one of the places the guides settle for twelve months, because the note itself does the work a second year of history would otherwise do. Royalty income follows the same twelve-month and three-year shape.

What does Fannie Mae require before the payments count?

When I run a file under Fannie Mae's rules, I open Fannie Mae Selling Guide B3-3.4-11, Notes Receivable Income, revised 03/04/2026. It is one short table with four rows.

Documentation. I'll need two things from you. The first is a copy of the note, which the guide says is there "to establish the amount and length of payment." The second is proof that you received the payments for the most recent twelve months. Bank statements, canceled checks or a record of the electronic deposits all work for that.

History. The underwriter reads those twelve months for "the receipt of full, regular, and timely payments." The same row adds that "payments on a note executed within the past 12 months, regardless of the duration, may not be used as stable income." Executed means signed. If you closed the sale eight months ago, the payments are real money in your account, and we have to wait a few more months before I can count them as income.

Continuance. I also have to document that the income is expected to continue for at least three years from the note date. Fannie measures those three years from the note you sign for your new loan, so the clock starts at your closing on the next home.

Qualifying income. Once your copy of the note and your twelve months of deposits agree, the guide lets me use "the monthly income amount as documented above" as qualifying income. That figure goes into your debt-to-income ratio alongside your other income.

How does Freddie Mac treat the same note?

Your conventional loan will be run under Fannie Mae's rules or Freddie Mac's, so I want you to know both. Freddie's version is in Single-Family Seller/Servicer Guide Section 5305.1, revised 08/05/2026, under the heading "Notes receivable requirements." It asks you for the same two documents: "a copy of the note evidencing the terms, including the scheduled amount and duration of payments," and "proof of receipt of payments for the most recent 12 months."

Two details work a little differently. On history, Freddie wants the payments "received on a regular monthly basis for the most recent 12 months." On continuance, Freddie reads the term written in your note. It "must have a remaining term of at least three years from the Application Received Date," the day the lender received your application. So Freddie's three years are measured a few weeks earlier than Fannie's.

Freddie also says plainly how much of the payment I can use. Its table sets the monthly income amount at "the full scheduled payment amount documented on the note," so I use the whole payment, principal and interest together.

What about FHA and VA loans?

FHA. If your next loan is FHA, I work from HUD Handbook 4000.1, Section II.A.4.c, dated 04/10/2025. It describes notes receivable income as income you receive "as payee or holder in due course of a promissory Note or similar credit instrument." Holder in due course means the person who holds the note and has the right to collect on it, which is you. I have to "verify and document the existence of the Note," so I'll need your copy. I also have to show the payments "have been consistently received for the previous 12 months," and FHA lets me do that with your tax returns, deposit slips or canceled checks. On continuance, FHA asks that the payments be "guaranteed to continue for the first three years of the Mortgage," so I'll be reading your note for the date the payments end.

For the amount, I use the current payment when it has been the same every month and will stay that way, and I average the previous year when it moves around.

VA. VA Pamphlet 26-7, Chapter 4, Topic 2, subsection r, dated February 22, 2019 lists notes receivable among the other types of income that may be counted as effective income, VA's term for the income it counts. I have to document "the history of receipt and the likelihood or continuance of the income for at least 3 years from the anticipated closing date." If we cannot show the three years, VA lets me consider whether it is reasonable to use the payments to offset a short-term debt of six to twenty-four months. So the note can still help you even when it cannot be counted as income.

Why do the twelve months and the three years matter so much?

Both tests come down to timing, and you can plan around both.

The twelve months are about the sale date. If you carried the note when you sold in March, the payments start counting the following March at the earliest. Between those two Marches the payments still add to the money you have in the bank, and they do not go into your income.

The three years are about the note's end date. A lot of seller-carried notes are written with a balloon, a lump-sum payoff due after a few years, so the seller gets paid out while the buyer refinances with a bank. What the buyer on the other side of that note has to think about is its own article. If the balloon is due inside three years from your closing (Fannie, FHA and VA) or from your application date (Freddie), the income does not count on that file. If the balloon is due in year four or later, I can count the payments on every program.

Does the whole payment count, or only the interest?

Your tax return and your mortgage file read this payment differently. On the return, selling a property and taking the price in payments over time is called an installment sale. The return reports the interest you received as interest income, and the principal is split between the part that returns your own cost and the part that is gain. So the return alone will not show the full payment as one number, which is one reason the guides ask for the note and the deposits.

Freddie counts "the full scheduled payment amount documented on the note," and Fannie counts "the monthly income amount as documented above." On both, the lender is looking at what you receive each month, which is a different number from what you owe tax on.

What should I gather before we talk?

Please provide a complete copy of the promissory note, all pages, with any amendments or modifications that came later, please. The underwriter reads it for the payment amount, the payment schedule, and the date the last payment or the balloon is due.

Please provide the twelve most recent monthly statements for the account that receives the payments. Please provide all pages, even if the last page is intentionally left blank, because underwriting has to see every deposit in the window.

Please provide your complete federal income tax returns, all pages and schedules, please. We will need the past two years for your personal returns and for any business that you may have an interest in.

If you also receive rental income from a property you kept, or dividend, interest or trust income, those come with their own short lists, and it saves time to gather everything in one sitting.

What goes wrong on these files?

The sale was too recent. A client sells in the spring, carries the note, and wants to buy in the fall. The payments are arriving, and the note was executed within the past twelve months, so under Fannie's rule they cannot be used as stable income yet. If you know that in the spring, we can plan the timing of the purchase around it.

A balloon inside three years. A note written to balloon in twenty-four months still pays you every month, and that balloon date keeps the payments from counting as income on the new loan. Freddie wants a remaining term of at least three years from the application date, Fannie wants continuance for three years from your new note date, and FHA wants the payments guaranteed for the first three years of the mortgage.

Cash, late or partial payments. The underwriter needs to see twelve months of deposits that match the note, in an account you still have, arriving in full and on time. Cash payments, payments into an account you later closed, or a buyer who often runs two weeks late or shorts a payment and catches up later all leave gaps in that record, and we will have to explain each one.

What does this look like with numbers?

The numbers below are made up to show the mechanism, and they are not a quote.

Say you sold a rental property two years ago for $320,000. The buyer put $70,000 down and you carried a $250,000 note, amortized over thirty years with a balloon due at the end of year ten. The scheduled payment is $1,580 a month, paid on the first of every month since closing by direct deposit into the same account.

You apply for a mortgage on your next home. The note was executed twenty-four months ago, so it clears the twelve-month rule. The balloon is eight years out, so it clears the three-year test under every program.

Scheduled monthly payment on the note	$1,580
Months of documented receipt	24
Monthly qualifying income from the note	$1,580

If your other qualifying income is $7,500 a month, adding $1,580 brings it to $9,080, an increase of about 21 percent.

Now suppose the same note had a balloon at the end of year three instead of year ten. At your application the remaining term would be twelve months, and the $1,580 would not count on any of the four programs. The payments, the buyer and the deposits would all be the same, and the balloon date alone would decide it.

What to do next

If you hold a note and you are thinking about your next home, you can price your own scenario with that income included. You choose the option that works best for you. What a documented pre-approval involves is the same review with your actual note and statements in hand.

If you have not sold yet and you are weighing whether to carry the financing, you're welcome to call me first. The balloon date and the payment schedule you agree to as a seller are the same two lines an underwriter will read the next time you buy. I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, and this is the kind of file I'd rather see early.

Nothing here is a loan approval, a denial, or a commitment to lend, and none of it is tax advice. The agencies revise these sections, so the linked text is the one to rely on.

Common questions

Does income from seller financing count toward a mortgage?

Yes. Fannie Mae, Freddie Mac, FHA and VA each allow payments you receive on a note to count as qualifying income. Fannie Mae's B3-3.4-11 requires a copy of the note and twelve months of receipt shown by bank statements, canceled checks or electronic records. The history has to show full, regular and timely payments, with continuance for at least three years from the note date.

How long do I have to receive the payments before they count?

Twelve months under Fannie Mae, Freddie Mac and FHA. Fannie adds that payments on a note signed within the past twelve months may not be used as stable income. VA names no month count. Its documentation must support a history of receipt and continuance for at least three years from the anticipated closing date.

What if my note has a balloon payment?

The balloon date is the continuance test. Fannie Mae wants the income expected to continue for at least three years from your new loan's note date. Freddie Mac wants a remaining term of at least three years from the Application Received Date. FHA wants the payments guaranteed to continue for the first three years of the mortgage. If the balloon is due inside that window, the payments do not count as income on that file. VA may still let the income offset a short-term debt of six to twenty-four months.

Does the whole payment count or only the interest?

Freddie Mac's Section 5305.1 sets the monthly income amount at the full scheduled payment amount documented on the note. Fannie Mae uses the monthly income amount as documented by the note and the twelve months of receipts. FHA uses the current rate of income when the payments are consistent and a twelve-month average when they fluctuate. Your tax return treats the interest and the principal differently, which is why the lender works from the note and the deposits rather than the return alone.

Estimates and educational information are not a loan approval or commitment to lend.