Counting Your Money
The most common form of income that can be used comes from your employer. Your lender will ask for copies of pay check stubs, W2s and compare those documents with filed federal income tax returns. The job must be considered full time employment at a job with at least 30 hours of work.
Part time income may be used but only if the borrower has a history of part time work. Some borrowers mistakenly think they can take up a part time job right before applying for a mortgage to help them qualify. Unless the borrowers can show a two-year history of part time employment, the income may not be used.
Self Employed Income
Self-employed income is the amount of net income listed on the borrowers’ federal tax returns. Borrowers are considered self-employed if they own more than 25 percent of an ongoing business. Further, the borrower must have received consistent income from the business for at least two years, documented by tax returns.
Another form of self-employed income is the commissioned borrower. A sales person who works on commission, even though they’re not self-employed, can count their commission as long as they have a two year history of consistent commission earnings.
Lenders like to see a minimum of two years of consistent employment before income can be used. But what about those who recently graduated from high school, college or left school to enter the work force? In this instance, there is no two year requirement as long as the borrower can provide a letter or transcript from the school documenting the time spent in the education system.
Interest and Dividends
Income from interest and dividends can be used as qualifying income if there is a history of at least two years consistent income reported on tax returns and there is a likelihood the income will continue for at least three years. This can sometimes be a judgment call by the lender when deciding if the income is likely to continue for at least three years but if a two year track record can be established and there is no reason to believe the income will disappear, the income may be used.
Alimony and Child Support Payments
Support payments may be used if the borrower wishes to include them. Support payments are verified by reviewing a copy of the signed divorce decree showing the amounts paid to whom over time. Support payments provided for children often stop when the child graduates from high school or reach the age of 18. If the child is 17 years old at the time of the loan application, a lender won’t use the income to help qualify if the income stops at age 18.
Bonus income can be used to help qualify for a mortgage under specific circumstances. The bonus income must have been received for at least the most recent two years with a likelihood of continuance. A regular bonus will likely be used compared to an irregular bonus such as a one-time performance bonus.
Social Security and Disability Income
Both types of income may be used to help qualify and is almost always accompanied by an “awards letter” which spells out the amount and frequency of the payments. Certain income that is tax-exempt, such as disability income, may be increased by an amount commensurate with the borrower’s federal income tax rate.
In the eyes of a mortgage lender, all income typically falls under the same litmus test: have you received it regularly and will you likely receive it in the future? If the answer is “yes” in both cases, the income may be used to help qualify.