Which sources of income count toward qualifying for a mortgage? Which ones don't? Consistency is key!
In order to qualify for a mortgage, you must demonstrate that you will be able to make payments on the loan consistently. Mortgage lenders take a risk every time they lend money to someone. They use a process called underwriting to evaluate mortgage applicants and estimate how much of a risk it would be to lend to them. The more regular income an applicant has, the less of a risk they might be for the lender. What do we mean by “income” here? What sources of income will lenders accept from prospective borrowers? Read on to learn about how mortgage lenders assess different types of income.
What is “income” for mortgage purposes?
Income refers to money that you receive in exchange for work or investments. It can also imply money received on a regular basis, such as a weekly paycheck or an annual dividend.
Regularity or consistency is the key to understanding what mortgage lenders mean when they talk about “income.” A borrower will be expected to make regular payments, usually on a monthly basis. Due to amortization, each payment includes a portion of the principal of the loan and interest paid to the lender.
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Mortgage lenders want to see that an applicant has enough regular income to keep up with the monthly mortgage payments. They will look at an applicant’s “gross monthly income” (which is before taxes are taken out) during the underwriting process.
Federal law governs this process for lenders. The Truth in Lending Act, as amended by the Dodd-Frank Act in 2010, establishes “ability to repay” standards for lenders that require them “to make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling.” Lenders have some discretion to decide what kinds of income they will accept.
Types of Income that Count Towards Mortgage Qualification
The types of income that mortgage lenders will consider part of an applicant’s gross monthly income are not limited to employment income, as long as the applicant can show that they have been receiving it regularly and consistently. Acceptable forms of income include:
Wages and salary
Freelance or independent contractor income
Leave pay, such as maternity, paternity, or medical leave, if an applicant can show that they will be returning to work
Child support and spousal maintenance payments
Retirement and pension benefits
Certain types of investment income, as long as they come in on a regular basis
Rental income, possibly subject to some limitations
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When a married couple or another group of people are jointly applying for a mortgage, the lender will usually combine every applicant’s gross monthly income.
You cannot combine your income with the income of someone who will not be living with you, with one exception. If you are applying for a mortgage loan backed by the Federal Housing Administration (FHA), you may also be able to include the income of one or more “non-occupying co-borrowers.”
» READ MORE: FHA Loans: Requirements, Limits, & FAQs
Types of Income that Might Count Towards Mortgage Qualification
Some types of income may receive extra scrutiny from lenders during underwriting. These include:
Interest and dividends
Foster care income
Lottery winnings - but only if you choose to receive it over time as an annuity instead of a lump sum
Income received as paper cash
» READ MORE: Do's & Don'ts of Using Cash During the Mortgage Process
How do I prove these sources of income for a mortgage?
Fannie Mae and Freddie Mac have established guidelines for the types of documentation that lenders should require for various types of income. While these are not mandatory, most lenders follow the guidelines to some extent. Lenders usually want to see a history of your bank statements.
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Tax documents like W-2s can establish most types of income related to employment, along with pay stubs directly from an employer. Self-employed applicants can use recent tax returns to show income, while freelancers and independent contractors can present 1099 forms received from clients.
Tax returns will usually show most other forms of income such as interest or dividends. Non-taxable income, such as child support, will require other types of documents. For child support, court paperwork can establish the amount received each month.
Types of Income that Do NOT Count Towards Mortgage Qualification
These types of income do not create a steady revenue stream, so they might not reassure a lender that a prospective borrower will be able to make loan payments for fifteen or thirty years.
Court awards or settlements
Lottery winnings if received as a lump sum
Now is an excellent time to be in the market for a new home. If you aren’t sure whether your income would qualify you for a mortgage, The Wood Group of Fairway is here to answer your questions and discuss your concerns.
See what you qualify for by filling out our easy Get Started form. It only takes ninety seconds!