Will Lenders Count All Income I Receive?
Are you worried that a lot of your income isn’t going to be counted?
Some examples are those who receive child support, a good chunk from military allowances, or your converted garage to a roommate. Learn how lenders handle certain income when you apply for a mortgage.
Most people tend to think of “income” as the figure you receive on a payroll check from your employer on the 15th and 30th of each month or every two weeks. For lenders, however, many forms of income are entirely acceptable for mortgage underwriting.
A person’s “income” can be categorized differently. It may be derived through a salary, overtime pay, periodic bonuses, or commission – all of which will satisfy lender’s requirements but does not include everything. The list of acceptable types of income is actually a great deal more. By providing the correct documentation lenders can easily consider the following sources of income to qualify loan applicants based on Fannie Mae guide 10-2-2018 (https://www.fanniemae.com/content/guide/selling/b3/3.1/09.html#Foreign.20Income). Of course additional conditions apply for some to be acceptable.
- Automobile Allowance
- Boarder / roommate Income
- Capital Gains Income
- Child Support
- Disability Income – Long Term
- Employment Offers or Contracts
- Employment-Related Assets as Qualifying Income
- Foreign Income
- Foster Care Income
- Housing or Parsonage/Manse allowance
- Interest and Dividend Income
- Military Base pay, flight or hazard pay, rations, clothing/quarter’s allowance, and proficiency pay
- Mortgage Credit Certificates
- Mortgage Differential Payments Income
- Notes Receivable
- Public Assistance
- Retirement, Government Annuity, and Pension Income
- Seasonal Income
- Social Security Income
- Spousal Support
- Temporary Leave Income
- Tip Income
- Trust Income
- Unemployment Benefits
- VA Benefits Income (non-education)
Some of the income above may have additional conditions to be allowable. For example, a note receivable needs to have 24-36-months remaining to be usable.
Taxable and non-taxable mortgage income
Lenders want to see income which has been confirmed on IRS tax forms. If you receive rental income and do not report in on Schedule E you will not be able to use that as income for a conventional loan.
Document your Income
From a lender’s viewpoint “income” is usable only if the borrower can fully document the source. Lenders have an obligation to verify that all borrowers have the ability to repay their mortgage. Therefore the requirements are strict.
Consider alimony. According to Freddie Mac guidelines a borrower receiving alimony must provide several forms of supporting documentation, including:
- Proof that alimony has been received for the last six months.
- Proof that payments are going to continue for a minimum of three years.
- Copies of the legally binding separation agreement or a final divorce decree.
- Proof of the age of the children involved if applicable.
Strategies
Ever since the housing crisis, it might seem like an excessive amount of paperwork but lenders will be more eager to work with if you can provide plenty of documentation to support the income you are claiming. It is quite simple to understand. They are the ones lending you the money so the burden is you to prove your income.
Make sure when you pay for bills such as rent or car payments that it is clearly paid from your account. No cash payments, money orders without a paper trail, or asking a non-borrower to pay your bill.
When depositing income it’s recommended to deposit each check separately than to commingle personal and work-related deposits into one deposit. Deposits made by your mobile phone are easy to document payments. It’ll usually say “mobile deposit” on your bank statement.
Income Reductions
In some cases, you will not receive the full amount of income you deposit. The common example is rental income. If your rental property brings in $16,000 annually, lenders are normally going to reduce it by 25-percent which gives you $12,000. The reason why is lenders anticipate vacancies and unexpected maintenance requirements. It is possible you can convince the lender otherwise if you have a long-term tenant on rent-control who’s lived there for 15 years or a long-term roommate and you have their checks to prove they rent a room from you.
Don’t confuse your total income
When lenders calculate your debt-to-income ratio (DTI) they are using your monthly income. When they mention “monthly income” they actually mean your gross monthly income. However, the amount many borrowers receive is the net amount, after taxes are taken out. A good underwriter will typically increase that amount for qualifying purposes to the gross figure. That is a benefit in your favor.
To learn more about usable sources of income, get pre-approved. Show your income documentation to the lender and see if tit is acceptable or what else you can do to make it acceptable. Also ask about grossing-up and reductions because such calculations can impact your ability to qualify for financing.
