Types of Income You Can Use
Last updated
Last updated
LEARNING OBJECTIVES
Diverse Income Sources for Mortgages: Identify different types of income that can be used to qualify for a mortgage.
Income Verification Process: Understand the process and documentation required for verifying various income sources.
Strategic Financial Planning: Learn how to present your income effectively to maximize your mortgage options.
When applying for a mortgage, your income is at the heart of the lender’s decision-making process. But contrary to popular belief, they don’t just look at your salary. A wide range of income types can qualify, provided they meet the criteria for stability, consistency, and reliability. Knowing which income sources count, how they’re evaluated, and what documentation is required can help you navigate the mortgage application process with confidence.
For most borrowers, salaried and hourly wages form the cornerstone of their income portfolio. Lenders view these as stable and predictable, making them easier to assess. Typically, lenders require pay stubs, W-2 forms, and employer verification to confirm your income. While a consistent job history of at least two years in the same field is ideal, lenders can sometimes consider shorter tenures if the job switch is within the same industry or reflects career advancement.
For those whose earnings include regular bonuses or overtime, these additional income streams can bolster mortgage eligibility. However, lenders often require at least a two-year history of receiving these payments to establish consistency. Documentation such as historical pay stubs and tax returns is critical in demonstrating that these earnings are a reliable component of your income.
Self-employed individuals face more scrutiny because their income can be variable. To qualify, you’ll need to provide tax returns for the past two years and profit and loss statements that detail your business’s financial health. Lenders will closely examine the stability or upward trajectory of your income and assess the long-term viability of your business. While self-employment offers freedom, proving consistent income requires careful record-keeping and organization.
If your income is heavily commission-based, lenders approach it with caution due to its potential variability. They will typically average your income over the past two years to establish stability. As with bonuses, you’ll need to supply tax returns and pay stubs that reflect a history of consistent or growing earnings. Providing an explanation for any fluctuations can also help your case.
For those who receive income from investments such as dividends or interest, lenders can include this in their calculations if it’s regular and likely to continue. You’ll need to provide documentation such as investment statements and tax returns to prove the stability of this income source. Keep in mind that lenders often require evidence that the investments generating this income will remain viable for the foreseeable future.
If you own rental properties, the income generated can enhance your mortgage application. To qualify, lenders will ask for current lease agreements and tax returns to confirm the consistency of rental payments. Typically, only a portion of the rental income (often 75%) is considered, to account for potential vacancies or maintenance costs.
For retirees or those nearing retirement, income from pensions, Social Security, and other retirement accounts can be counted as long as it’s predictable and long-lasting. Benefit award letters, bank statements, or 401(k)/IRA distribution statements are commonly required to verify this income. The permanence and stability of these payments make them highly favorable in the eyes of lenders.
When applying for a mortgage, presenting a complete and diversified picture of your income can improve your chances of approval. Beyond the raw figures, lenders will analyze your income sources in relation to your debt-to-income ratio (DTI). A lower DTI, reflecting a manageable balance of income and debt, signals to lenders that you can handle additional mortgage payments comfortably. Ensure that your application showcases not just the amount but also the reliability and continuity of your income.
Many borrowers mistakenly believe that only salaried income is acceptable for a mortgage. In reality, lenders consider a wide array of income sources, provided they meet their criteria for stability and documentation. Another common misconception is that new sources of income—such as a raise or a new job—will immediately qualify. While these can be factored in, they often require verification that the role is within the same field or industry and reflects a natural progression in your career.
Did You Know?Lenders prioritize consistency and predictability above all else when evaluating income sources. Demonstrating a steady income history, whether from traditional employment or other avenues, can significantly strengthen your mortgage application.
"Understanding the breadth of income sources acceptable for mortgage qualification can open doors to homeownership. Presenting a comprehensive and stable income profile is crucial in securing the best mortgage terms for your situation."
