If you are thinking of applying for a mortgage soon, you need to know what types of income you can use to qualify. Just because you make money doesn’t mean you can use it for qualifying purposes. Lenders have strict requirements for income. They have to make sure that it’s consistent and reliable. They do this by looking at your history of receipt of this income.
Read below to see which types of income lenders are most likely to accept.
If you are on a salary, you have the least amount of requirements regarding your income. As long as you have received the income for a while and can show a steady pattern of receipt, you’re in good shape. Just how long you have to receive the income in order to use it depends on the lender and the situation.
Technically, lenders want to see a 2-year history of receipt of income. But, you aren’t necessarily out of luck if you don’t have a 2-year history. Some lenders allow a history of just 12 months. This gives them ample time to see that you receive the income regularly each month.
In some cases, you may even be able to receive the income for just a few months. Lenders allow this when you changed jobs, but have a history of a similar salary at a similar job prior to the new job. Let’s say you were a teacher at one school for 3 years, but then changed schools. After being at the new school for 3 months, you apply for a mortgage. While you only have proof of the new income for 3 months, you have a history in the industry. Some lenders may still allow the income.
You can make hourly income and still qualify for a mortgage. Lenders usually stick to the 2-year rule for hourly income, though because of its inconsistency. Lenders like to see the average number of hours you work over a 2-year period. If you are full-time and can prove that your hours don’t fluctuate, you may be able to get away with a 1-year history of the hourly income.
Lenders take an average in order to account for the highs and lows your income likely experiences if you work on an hourly basis. If they qualified you based on your hours during a peak time, they may approve you for a mortgage payment that’s hard to afford during other times of the year. If they qualify you based on your hours during a slower time, you may be able to afford more than they give you.
Working for yourself has its advantages, but when you want to qualify for a mortgage, it can prove to be a little more difficult. It’s not impossible to use this income, but you’ll have to jump through a few more hoops.
Like any other unpredictable income, lenders need proof of receipt for at least 2 years. You’ll provide your tax returns from those two years to prove your income. You’ll also need to provide proof of actual receipt with your bank statements. Lenders will take a 2-year average with this income as well.
Something to keep in mind with self-employed income, though, is that lenders can only use your adjusted gross income as reported on your tax returns. If you take a large number of deductions as a self-employed borrower, which is perfectly legal, it decreases your adjusted gross income. In turn, it could decrease the amount of mortgage that you qualify to receive.
If you are an established investor that has received dividends for the last few years, you may be able to use them for qualifying income. Like any other variable income, lenders will require a two-year history. In this case, you must also prove that the distributions will last for at least another three years.
You’ll prove investment income with your tax returns from the last 2 years as well as your most recent bank statements to prove its receipt. Lenders will take a 2-year average of the income in order to ensure that they use a fair amount of income when qualifying you for the loan.
Child Support or Alimony
If you receive court-ordered child support or alimony, you may be able to use it for qualifying purposes. Notice the keyword, though, court-ordered. If you have a verbal or even written agreement with your ex-spouse, but it’s not court-ordered, a lender can’t use it. There’s nothing to enforce the continuance of the payments, which could leave you without the money you need to pay your mortgage.
Typically, you need at least a six-month history of receipt of the alimony or child support payments. In addition, you must prove that the payments will continue for the next three years. This will be evident in the court documents. For example, let’s say you have a child that is 16 years old; you won’t receive child support for the next three years, since it usually ends when the child turns 18-years old. If you have a 5-year old child, though, chances are you’ll be able to use it.
Social Security and Retirement Income
If you receive retirement income, you may use it for qualifying purposes as long as it’s consistent and determined to continue for at least 3 years. This pertains mostly to 401K or pension income. You must be able to prove that there is enough there to provide you with income for at least the next three years.
You’ll prove your retirement income with an award letter, investment statement, and bank statements. The bank statements prove the receipt of the income. Make sure you receive the income regularly (on the same date each month) and that you deposit the full amount in your bank account for the lender to reference it.
Finally, you can even qualify for a mortgage with disability income, as long as you can prove you’ll receive it long-term. If you are on short-term disability and it will end within less than three years, you won’t qualify. If, on the other hand, you can prove that you don’t have an ‘end date’ in the near future, you may be able to use it for qualifying purposes.
Just like any other income, you must prove its existence as well as receipt of the income. You prove existence with the award letter from the entity paying you the income. You’ll prove receipt with your bank statements. Again, the amounts must match in order for a lender to use it.
Don’t make the mistake of thinking that if you don’t earn a salary that you can’t get a mortgage. Lenders can work with a large variety of types of income; you just have to be able to prove regular receipt of the income.