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What Income Is Considered When Applying for a Mortgage?

| Home Buyer Guidance

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

Lenders will assess all of 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.

Regular Income Calculations

For salary and wage earners, a lending partner 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 boss 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 W2 forms for these as well.

Income Type Required Documents Source of Income
Paycheck: Salary or Hourly Recent Pay Stubs, W2, 1040 Tax Form Pay Stub, W2, 1040 Tax Form
Sole Proprietorship 1040 Tax Form Schedule C Tax Form
Partnership Tax Forms: 1040, K-1, 1065 Schedule DE, K-1, 1065
S. Corporation Forms: 1040, K-1, 1120S Forms: 1040, K-1, 1120S
Corporation W2, 1120 W2, Schedule B, 1120

 

You will likely need these documents for at least the last two years.

Military Income

The same documentation rules apply for soldiers and their families. One benefit for our 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.

Other Gains

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 Calculations

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.

Viable debt sources include:

  • Monthly minimum credit card payments
  • Monthly car payments
  • Personal and student loan monthly payments
  • Monthly child support and alimony payments (these can be income sources if you’re paid each month)

To determine your DTI, your lender will total your monthly debts and divide that amount by the money you make each month. Most mortgage programs require homeowners to have a Debt-to-Income of 40% or less, though you may be able to get a loan with up to a 50% DTI under certain circumstances.

Lenders want to ensure you can pay your mortgage, so they’ll typically only approve you if your annual payments are less than 30% of your annual income.

If you think your debts are low enough and you can afford a payment that’s up to 30% of your income, speak to a lender today about the homes available to you. But to protect your best interests and the lender’s too, be sure to purchase a home you can truly afford. No one benefits if you take too large a risk.

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