Income is income, right? Unfortunately, when it comes to qualifying for a mortgage this is not true. Different lenders require different parameters. What you consider income a lender might not agree. You have to have viable proof of the income as well as prove its longevity. For example, a job you started two months ago will probably not help you qualify for a loan. The same is true for the money you make from side jobs. Here are the most common parameters lenders look for in income.
This is the most common type of income. Salary is income you receive on a predetermined basis. It does not matter if you receive payment weekly, bi-weekly, or monthly. The lender will look at your paystubs and determine your gross annual income based on your year-to-date income. They will inquire about the frequency of payment and then require the paystubs covering the last month worth of income. For example, if you receive weekly payments, you will need to provide your last 4 paystubs. If you receive payment monthly, they will require one paystub. However, most lenders will want to see at least 2 months’ worth of income if this is the case.
Salary is the most reliable because it does not fluctuate. Your income is predictable because you receive it on predetermined dates and for the same amount each time. This means the lender can rely on the fact that you will bring home adequate money to make the mortgage payment you qualify to receive. This gives the lender reassurance of your low likelihood of default as long as the remaining factors of your application, such as your debt ratio and credit score are good.
Bonuses and Commission
It starts to get a little tricky when you have bonus or commission income. You cannot use this income unless you received it for the last 2 years. Some lenders will make exceptions to this rule, but in general, the longer you receive it the better. This is because both types of income fluctuate greatly. Bonuses and commission both need to be annualized. This means the lender needs to see how much you make over the course of a few years. The lender will then average the income. Let’s say that in Year 1 you made $60,000 in commissions and Year 2 you made $75,000 in commissions. The lender will average these two numbers to come up with your income, which in this case equals around $67,500. This accounts for the highs and lows your income will likely experience throughout the year. If the lender based your income solely on the higher $75,000, you might qualify for a loan payment higher than you can afford during certain times of the year.
Self-employment income is another tricky factor. Yes, many lenders and loan programs allow it, but you have to have ample proof of the income. In this case, you need to provide your tax returns for the last two years. This gives the lender an idea of the income you claim with the IRS. This is the amount they can use to qualify you for the loan. This means that if you claim many expenses, your qualifying income will be lower than what you actually bring home. Again, lenders need to average your income over the last 2 years to account for the peaks and valleys your income experiences. In some cases, borrowers claim too many expenses, making it difficult to qualify for a loan. Consider this issue when you think about applying for a mortgage. Sometimes it pays to hold off on writing off too many expenses so you can qualify for a mortgage.
Social Security and Disability Income
You can also use social security and disability income you receive from the government to qualify for a loan. You will need to provide official proof of this income with your award letter. This will show the lender the amount of income you should receive. However, you have to prove receipt with your bank statements. Generally providing 12 months of bank statements with the receipt of income is sufficient. You also have to prove that the income will continue for at least 3 years. This may or may not be on your award letter. If it isn’t, you have to secure additional documentation to prove it.
Child Support and Alimony
You do not have to claim your child support or alimony payments as income on your mortgage application, but you can if you want to use it to qualify. In this case, lenders need to see receipt of the payment as well as proof the income will continue. This means you need to provide:
- The court ordered divorce decree or child custody agreement
- Bank statements showing actual receipt of the payment
- Proof of the length of time you will receive the payments
You must receive the income for the next 3 years in order to use it for qualifying purposes. If your child is 17 and you only receive payments until he is 18, for example, this income would not count. On the other hand, if he is 5 and you receive payments until he is 18, you can use the income for qualifying purposes.
Reliability of What Lenders Accept as Income
No matter the type of income you receive, lenders want to see that is reliable. This means two things:
- You received it for a dent amount of time in the past (typically 2 years)
- You will receive it for the foreseeable future
How do you prove these things? The best way is to have consistency. For example, a job you held for 3 years and pays you on a regular basis, such as bi-weekly or monthly, is consistent. A job you held for 6 and only pays you based on commissions you earn is not consistent. The longer you hold the job, the more consistent the lender considers your income. This goes for any type of income that comes from a job, whether you are self-employed or work for someone else.
In addition, longevity of your job helps the lender believe you will hold it for the foreseeable future. Your employer can also prove this with a Verification of Employment. Either verbally or in written form, they can verify that you will hold this job for the near future. This does not mean you cannot lose your job anytime soon, but if everything continues as it is, your employer can verify your future employment. If you own your own company, the lender can look at the industry your company operates in to determine the likelihood of future income.
There are many differences in what lenders accept as income. In addition, every loan program has its own parameters. If you find that you do not qualify for a standard loan program, you always have the option to shop with different lenders who have different programs. Lenders who fund their own loans often have more flexibility in the terms they can provide their borrowers.