The main driver for all conventional mortgage loan applications is qualifying income. This is the single most important metric followed by credit scores and assets since your qualifying income determines your ‘ability to repay’ the mortgage loan. After all, it does not matter how much money you put down or what your FICO credit scores are if you still can not afford to make the mortgage payment every month.
Determining a borrower’s qualifying income has become more challenging over the years. While some borrowers still receive a traditional salary, it is becoming much more common for people to be self-employed or receive compensation in non-traditional ways.
This creates an issue where qualifying income can diverge from actual income, resulting in borrowers qualifying for less than they can actually afford.
Oftentimes the best solution to this problem is for a mortgage lender to enlist creativity by finding alternative income sources for borrowers in non-traditional ways. Below are some examples how how this can be done:
Asset Depletion – Mortgage lenders take the borrower’s liquid assets such as savings, investment accounts, and retirement funds, and use a formula to calculate a portion of these assets as monthly income. Typically, 100% of savings accounts can be utilized and 70% investable assets are allowed. Depending on the loan program total assets are typically divided by 360, 240, or 60 months for calculation purposes.
Interest/Dividends – Mortgage lenders typically require a two-year history of receiving interest and dividend income to ensure it’s stable and reliable they also require proof that that interest/dividend income is likely to continue. This is generally verified through tax returns and account statements.
Retirement Distributions – Withdrawals from certain retirement accounts, such as IRAs or 401(k)s, typically starting at age 65. These distributions can count as income when qualifying for a mortgage, which is especially beneficial for retirees. The key is that they are consistent, regular, and have enough continuance.
Trust Income – Borrowers need to show reliable, ongoing distributions from a trust. Mortgage lenders often require trust documents to confirm the terms and duration of the income. If the trust is set up for a limited period, lenders may consider the timeline to ensure the income will continue for at least three years. There are also seasoning requirements so newly established trusts might not be usable right away.
Capital Gains – This typically requires proof of a two-year history of capital gains income, verified through filed tax returns, along with proof of assets to sell. This demonstrates that the income is consistent rather than from a one-time event – which is important.
Alimony/Child Support – Lenders require a divorce decree or marriage settlement agreement (MSA) to verify the amount and terms of payment received. Depending on the scenario, a borrower may need at least three to six months of receiving support in order to be able to utilize the income.
In all of these cases, it must also be established that the income is expected to continue for at least three years from the mortgage application date to count as qualifying income.
If any of the above are not viable, sometimes the best option is to search for a Non-Qualified (Non-QM) mortgage loan.
Ultimately, it is important for mortgage lenders to match up qualifying income with documented income. This ensures that borrowers are able to afford their monthly payments without compromising on price.
If you have any questions about qualifying for a mortgage, give us a call at (760) 930-0569. One of our experienced Mortgage Loan Originators will be happy to help.
