Claiming Multiple Incomes When Applying for a Mortgage Loan
Having multiple jobs is common these days, but lenders have some rules when it comes to income that qualifies to be used for a mortgage. Lenders accept most income sources that people typically have, but how they calculate it, and what documentation they will need varies based on the source, length, and amount of income.
Income Needs to Be Stable
Mortgage lenders look at three major factors when considering a person’s income:
- The consistency of the income
- How long the income has been received by the borrower
- The likelihood that the income will continue in the future
These considerations are easier to assess with certain incomes than others. Here is how mortgage lenders look at various sources of income:
This is income received through salary or wages when employed by somebody else. Lenders typically prove this income through a combination of recent pay stubs, W-2s, and written or verbal verification of employment from your employer. Additionally, your lender will also be looking to verify your job title, length of employment, and how likely it is for your employment to continue.
Lenders will typically look for a two-year employment history, though less may be acceptable if you are new to the workforce.
For self-employment, lenders typically require that you’ve been doing so for at least two years. Verification comes via copies of income tax returns and often requires a copy of a business license or verification of the length of your self-employment with your CPA.
Income will generally be averaged over the most recent two years, and adjustments will be made such as adding back depreciation expense, since it is not an actual cash expense.
Your lender will be looking for a pattern of stable or increasing earnings over time. If your income in year two is marginally lower than that of year one, your lender may still qualify you based on the lower amount. If your loan is considered high risk because of substantially declining income, you may not be qualified at all.
As with other incomes, your lender will typically need two-years of history to use rental income. This will be your net income, which is the gross rent, minus the expenses of owning the property. As with self-employment, non-cash expenses like depreciation will be added back.
If there is a loss on your rental properties, that shortfall will be calculated on a monthly basis and added to your long-term debt in order to calculate your debt-to-income ratios.
The rules for using investment income are sometimes more confusing than with other income types. Lenders typically require the following to consider investment income:
- A two-year track record of receiving investment income
- An investment asset portfolio sufficient to support the claimed income
- Income tax returns from the past two years, and financial statements proving the value of your investments.
Secondary Income Sources
This covers a range of different income sources, with the two most common being part-time jobs and side businesses.
In the case of a part-time job, your lender will typically look at a two-year history in which you held both your full-time position and your second job. They will average your income over the past two years, supported by pay stubs and W-2s.
Side businesses are considered much like full-time self-employment. The lender is looking to verify that you have maintained a side business that has been profitable for at least the last two years. You will be required to produce tax returns complete with Schedule C, verifying your income.
If you’re applying for a mortgage, it is smart to volunteer any income sources that you have. Your lender will let you know if it is acceptable for qualification, and will walk you through the steps of verifying the income.
We understand that financing a home can be a daunting task, but the experts here at Butler Mortgage are here to help. Our Loan Officers will do everything possible to make your mortgage experience as painless as possible, so you can spend less time worrying, and more time enjoying your home. Call us today at 407-931-3800 with any questions.