You know exactly what you earn, but when qualifying for a mortgage, lenders will look at income somewhat differently and scrutinize details. It’s not just about what’s documented on your most recent pay stub, but also about what meets current lending guidelines. Unless your compensation is an incredibly straightforward salary, and you have been employed at the same place for two plus years, qualifying for a loan can get complicated.
The reality is that not all income is treated the same. Certain sources are more consistent and reliable than others, which means lenders have specific rules about what they can count towards qualifying. Oftentimes, lenders are forced to take a conservative approach, which results in actual income being higher than qualifying income. As a general rule of thumb, income must be stable and expected to continue in order to be used.
Common Income Types Which Require Extra Verification OR Are Often Haircut:
- Bonuses, Overtime, and Commission: Lenders usually require a two-year history of this type of income to count it toward your mortgage. It needs to be consistent and documented—if you just started earning higher bonuses or commissions recently, they may not use the full amount (or any of it) until there’s a longer track record. Because there is a two-year lag, these types of income are often lower than current wages.
- Rental Income: Oftentimes, only 75% of future rental income is utilized to account for potential vacancies and property expenses. It also must be reported on the tax returns, which often contain many write-offs. These two factors make it so that qualifying income is often lower than the actual amount. If it’s not documented properly or if the property is recently bought, the income might not even be usable.
- Second/Multiple Jobs or Part-Time Work: Lenders typically want to see at least two years of consistent income from a second job or part-time work before they’ll count it towards qualifying. This helps show that the income is stable and likely to continue. If the job is new or the hours vary a lot, it may not be considered reliable enough to use for qualifying.
- RSUs (Restricted Stock Units): Some lenders may count this income if only the shares are fully owned (not pending or locked) and there’s a history of payouts. They’ll also want to see that you receive RSUs regularly. If the RSUs haven’t been paid out yet or are unpredictable, they probably won’t count toward qualifying.
- Alimony/Child Support: Must be documented and expected to continue for at least 3 more years. Additionally, at least 3-6 months’ evidence of receipt is required prior to closing. Oftentimes, people are looking to qualify immediately after a divorce situation, but these requirements prevent them from doing so immediately or in the long run.
Recently Changed Jobs?
If you’ve switched jobs but stayed in the same field and your pay structure didn’t change, your ability to qualify should be fine. That said, if you jumped from salary to commission-only pay structure or took a new part-time role, your mortgage lender might need more info—or might not be able to count all your income yet.
Self-Employed?
Self-employed individuals often have the largest discrepancies between their actual income and their qualifying income. There are many different business entity types and pay structures, which make it difficult to go into specific detail, but the general issue remains the same. Oftentimes, self-employed individuals optimize for tax purposes/considerations on their returns, which is inversely related to mortgages for the most part. While some deductions from income get added back for qualifying purposes, many don’t, and that often leaves the self-employed individual stuck.
Pro Tip: The more consistent your work history and pay structure, the better. If you’re thinking about changing jobs or starting a new venture, it’s best to wait until after your loan closes, when possible. Making a switch mid-process or after being pre-approved can impact the mortgage loan process.
Bottom line: Your actual income could be much higher than your qualifying income. If you’re not sure what counts, reach out. It’s better to know upfront than be surprised later.
If you have questions, please contact our office to discuss your mortgage needs with one of our experienced Mortgage Loan Originators at (760) 930-0569
