What Income Can I Use to Qualify for a Mortgage
Lenders are required to verify a borrower’s ability to repay the mortgage. Doing so protects both the lender as well as the borrower. The borrower takes out a mortgage and the monthly payments are comfortable for them and the lender is protected by receiving what is called “safe harbor.” This status is a result of approving a loan with certain consumer-protecting provisions. More specifically, monthly debt compared to gross monthly income should be no greater than 43 percent. This ratio includes all monthly credit
obligations as well as the mortgage payment which also includes a portion to property taxes and insurance. But then, what about the income? What income can be used to qualify for a mortgage?
The most common source of qualified income is income that comes from an employer. It’s a job and the employee gets paid each month. To verify this monthly income, borrowers provide copies of recent pay check stubs and W2 forms from the previous two years. Two years of employment is required in order to use this income. If someone has less than two years of employment, the income may not be used. This requirement is waived for those recently graduated from college or trade school. Qualifying income in this scenario is from full time employment. Part time employment may also be used but there must be at least a two-year history of part time employment and the lender must also determine the part time income is likely to continue into the future.
For the self-employed borrower, qualifying income comes from two years of federal income tax returns, business bank statements and a year-to-date profit and loss statement. For someone with less than two years of self-employment, that person must wait until two years can be verified.
It’s also somewhat common for someone to have a side business in addition to the money received from an employer. Can this income be used? If there is at least a two year history, the income is consistent and the lender can determine the income is likely to continue into the future, it may be used. You’re probably seeing a pattern here at this point. Income must be received for at least two years and the lender can make a reasonable determination the income will continue into the future. How long into the future you might ask? That’s a good question but typically a lender will be comfortable if it appears the income will continue for at least another two to three years. Of course there’s no way to truly make this determination but if the income has a history there’s no reason why the income should cease.
Interest and dividend income can be used following the same two-year history rule. In short, if income is received in the past and the borrower makes no indication the income will stop, it can qualify. If you’re not sure, call me and we’ll review your situation.