What income is considered when applying for a mortgage?

Determining whether your income is sufficient to get a home loan isn’t as simple as just looking at your pay stub.

What kinds of income qualify for a mortgage?

Lenders will assess all your income sources and monthly debts to figure out what mortgage you can afford and have the likely ability to pay back. We’ve put together a list of sources, variables, and debts to help you determine if you may be eligible for a loan.

Employees vs. Self-employed or freelance

For salaried and hourly wage earners, a mortgage lender will want to see current pay stubs as well as W-2 tax forms for the past two years. If you’ve recently had a change in pay, such as a raise, you’ll also need to get a statement from your workplace confirming that the change is permanent.

You may also be able to use special-case income, such as overtime and commissions, as part of the income calculation for your mortgage. To qualify these items, you’ll need to document that you’ve received them for at least two years and provide confirmation from your boss that they’re expected to continue.

If this income comes from a source outside of your primary employer—such as part-time work or side jobs that pay only commission—you’ll need W-2 forms for these as well.

For self-employed income earners and freelancers, lenders will want to see records indicating that your income remains consistent from year-to-year. Minor fluctuations or decreases are typically acceptable—a lender is trying to determine your ability to pay back your mortgage.

Plan on providing tax returns that show your average earned income is enough to afford monthly mortgage costs. You will likely need these tax documents for at least the last two years.

Military Income

The same documentation rules apply for soldiers and their families. One benefit for military service members is that housing, base and food allowances can be included in income for mortgage calculations. Those deployed to war zones must provide documented confirmation, since income earned in these zones is not taxed.

Below are the required documents:

- W2

- Recent Paystub or Leave of Earning Statement

- 1040s with all schedules

Other types of income

In most cases, the only qualifying investment income is interest and dividends, because realized capital gains are not seen as reliable long-term sources. Investment income may be discounted due to its uncertainty.

Below are a few other sources of income that you may be able to include:

• Social security income
• Non-taxable income
• Rental or property income

Your ability to use these income sources depends on your lender. A good rule of thumb is that income not shown on tax returns or not yet claimed will likely not be considered in your mortgage qualification calculations.

Debt-to-income (DTI) ratio to qualify for a mortgage

Many mortgage lenders rely on a debt-to-income (DTI) calculation to assess your ability to pay for a loan. This calculation compares your monthly gross income, typically from the income sources above, to your monthly debt load.

Debt sources may include:

• Monthly minimum credit card payments
• Car payments
• Personal and student loan payments
• Monthly child support and alimony payments

To determine your DTI, your lender will total your monthly debts and divide that amount by your monthly pre-tax income. Most mortgage programs require homeowners to have a debt-to-income under 43% . The lower your DTI is, the more likely it is you will be approved for a mortgage since your risk of failing to repay the loan is also lower.

Closing thoughts: Qualifying income

No matter how you earn your income, mortgage lenders need to determine your ability to make payments on a loan if you’re taking one out to purchase a home. When you apply for a new mortgage, lenders are typically looking at factors that include:

• Your gross income: The total amount of your earnings before taxes and deductions are taken out. In addition to your monthly income from wages earned, this can include social security income, rental property income, spousal support, or other non-taxable sources of income.
• Your work history: This helps lenders understand how stable your income is and how likely you are to repay your mortgage. If you are a salaried or hourly wage employee, your pay stubs and/or W-2s will show this. If you are self-employed, expect to share your tax returns as evidence of income earned. In both cases, lenders will typically request to see your records from the last two years.