On this page
- What counts as income for a mortgage: the quick answer
- Do lenders use gross or net income?
- What makes income count: history, stability and continuance
- Common types of income for a mortgage
- How lenders calculate income for a mortgage
- What doesn’t count as income for a mortgage
- Documents to gather before you apply
- Frequently asked questions
Lenders count income for a mortgage when it is stable, documented and likely to continue, and they start from your gross pay before taxes. If the income has a set end date, such as child support, it usually has to last at least three more years. Wages, overtime, Social Security, pensions, alimony and some rental income can all qualify once you can prove them.
The rules below come from Fannie Mae’s Selling Guide, which governs conventional loans sold to Fannie Mae, and HUD Handbook 4000.1 for FHA loans. Individual lenders can also add stricter rules, called overlays. For unusual sources, see our guide to income types mortgage lenders accept.
What counts as income for a mortgage: the quick answer
Fannie Mae requires lenders to document that income “is stable, has a documented history of receipt, and is reasonably expected to continue” (Selling Guide B3-3.1-01). In practice, lenders check three things:
- History. Most income needs a track record, often two years.
- Stability. The amount should hold steady or rise.
- Continuance. When income has a known end date, Fannie Mae wants proof it will last at least three years from the application date.
FHA sets a broader rule. Under HUD Handbook 4000.1, section II.A.4.c (loans scored by TOTAL; manual underwriting repeats it at II.A.5.b), all income used to qualify must be “reasonably likely to continue through at least the first three years of the Mortgage.” Income that passes becomes your qualifying income, the monthly figure the lender compares with your debts.
Do lenders use gross or net income?
Lenders use gross monthly income for wage earners, meaning pay before taxes and other deductions. The Consumer Financial Protection Bureau defines the debt-to-income ratio as “all your monthly debt payments divided by your gross monthly income.”
For example, say a buyer earns a $60,000 salary. The lender starts from $5,000 a month ($60,000 ÷ 12), even though the actual deposits are smaller after withholding.
Self-employed borrowers are the exception. Because they deduct business expenses on their tax returns, lenders generally use net business income, the profit after expenses.
What makes income count: history, stability and continuance
A two-year history is the usual benchmark
Fannie Mae tells lenders to look for “a reliable pattern of employment over the most recent two years” (B3-3.2-02). However, a shorter history can still work when other strengths in the file offset it. FHA requires lenders to verify the most recent two years of employment and income (4000.1 II.A.4.c.ii).
Variable pay gets some flexibility. Fannie Mae accepts as little as 12 months of overtime, bonus or commission history with offsetting factors (B3-3.3-02). Similarly, FHA accepts overtime, bonus or tips earned consistently for at least one year (II.A.4.c.v).
Stability: steady or rising income is easiest to use
Lenders compare this year’s earnings with prior years. If variable income is falling, Fannie Mae requires the lender to confirm it has leveled off before using it. Likewise, if a lender learns you are moving to lower pay, such as a new job or retirement, it must qualify you on the lower amount (B3-3.1-01).
Gaps in employment during the past 12 months draw a closer look (B3-3.2-02).
Continuance: the three-year rule
When income has a defined end date, or comes from an account that will run down, Fannie Mae requires proof it will last at least three years. Say a buyer receives child support under an order that ends in two years. That income generally won’t count, because it fails the three-year test.
In contrast, wages with no end date need no extra proof. Once the history is documented, the lender may assume the job continues unless something suggests otherwise.
Common types of income for a mortgage
Requirements below are Fannie Mae’s unless noted. Your lender may ask for more.
| Income type | What lenders usually need | Notes |
|---|---|---|
| Salary or hourly wages | Recent pay stub and most recent W-2, or an employer-completed verification form (Form 1005); a verbal check with the employer follows | Current rate when pay and hours are steady |
| Overtime, bonus, commission | Pay stub and two years of W-2s | Averaged; a falling trend can rule it out |
| Self-employment | Two years of signed tax returns | Net income; see how to calculate self-employment income |
| Social Security, disability | Social Security: award letter, SSA-1099 or proof of receipt. Private disability: policy or benefits statement | No minimum history; see buying a house on disability |
| Pension or retirement withdrawals | Benefit statement, account statements or a 1099 | Account withdrawals must be able to last three years; see a mortgage in retirement |
| Alimony, child support | Decree or court order, plus six months of payments | Must continue three years (Fannie Mae and Freddie Mac) |
| Interest and dividends | Two years of tax returns or 24 months of statements | Two-year history required |
| Rental income | Lease or tax returns with Schedule E | 75% of the lease amount (minus the property’s full payment) if the property isn’t on your tax return yet; otherwise a Schedule E calculation |
| Temporary leave | Employer letter with your return date | See mortgage on maternity leave |
| Unemployment | Two years of tax returns | Seasonal workers with a two-year record (Fannie Mae and FHA) |
| Boarder, royalty, trust, VA benefits | Varies by type | See other income lenders accept |
How lenders calculate income for a mortgage
Salary and hourly pay
For salaried workers, lenders divide the annual salary by 12. For hourly workers with steady hours, they use the current rate. Say a borrower earns $25 an hour for 40 hours a week. Qualifying income is $4,333 a month ($25 × 40 × 52 ÷ 12). If hours vary, however, FHA averages the past two years (4000.1 II.A.4.c.iii).
Overtime, bonus and commission
When variable pay is stable or rising, Fannie Mae averages this year’s and last year’s earnings over at least 12 months (B3-3.3-02).
For example, say a borrower earned $7,200 in overtime last year and $4,800 in the first six months of this year. The pace is rising ($800 a month versus $600), so the lender averages all 18 months: $667 a month ($12,000 ÷ 18). FHA, on the other hand, uses the lower of the two-year average or the most recent year’s average (II.A.4.c.v).
Self-employment income
Lenders generally average net income from your last two years of tax returns. Fannie Mae may accept one year of returns if you have 12 months of self-employment income from the business and earlier income at the same level or higher in the same field (B3-3.5-01). FHA likewise allows one to two years after at least two years in a related line of work (II.A.4.c.x).
Grossing up nontaxable income for a mortgage
Since lenders measure income before taxes, tax-free income gets a boost called a gross-up. Fannie Mae has lenders add 25% of verified nontaxable income. If the tax a wage earner in a similar bracket would pay is higher, the lender may use that higher amount instead (B3-3.1-01). FHA caps the gross-up at the greater of 15% or the borrower’s tax rate from the previous year. In addition, the lender must document both the nontaxable amount and the tax rate (4000.1 II.A.4.c.xii(P)).
For example, say a borrower receives $2,000 a month in Social Security, and the lender verifies the full amount is nontaxable. Under Fannie Mae’s 25% gross-up, qualifying income is $2,500 ($2,000 × 1.25). Under FHA’s 15% limit, the most it could be is $2,300 ($2,000 × 1.15).
Only the nontaxable portion gets grossed up, though. Without extra paperwork, Fannie Mae lets lenders treat 15% of Social Security as nontaxable (B3-3.4-15). On $2,000, that adds $75, for $2,075 a month.
Rental income
For a rental not yet on your tax return, Fannie Mae counts 75% of the lease amount. Then it subtracts the property’s full monthly payment, including taxes, insurance and association dues (B3-3.8-04).
For instance, say a lease pays $1,500 a month and the property’s payment is $1,000. The lender counts $1,125 ($1,500 × 75%) and subtracts $1,000, leaving $125. However, with under 12 months of landlord experience, rental income can only offset the property’s payment (B3-3.8-01).
How qualifying income feeds your DTI
Next, the lender divides your monthly debts by your qualifying income to get your debt-to-income ratio. Fannie Mae allows up to 50% for loans run through its Desktop Underwriter system (B3-6-02). Manually underwritten loans start at 36% and can reach 45% with strong credit and reserves. For a budgeting view, see what percentage of income should go to a mortgage.
What doesn’t count as income for a mortgage
Some money that reaches your account won’t help you qualify:
- Income ending within three years, such as support with a known end date.
- Undocumented cash. FHA counts income only if it is legally earned and, when required, reported on your tax returns (II.A.4.c.i).
- Lump-sum payments, such as a one-time divorce equalization payment (B3-3.4-02).
- Most unemployment benefits, except seasonal ones with a two-year record.
- Pay in cryptocurrency, which Fannie Mae doesn’t accept (B3-3.1-01).
- Falling variable pay that hasn’t stabilized.
- Rent from your own home or second home, which generally can’t count apart from boarder income and accessory units (B3-3.8-01).
- Future raises, unless the raise is base pay, starts within 60 days after closing and your employer confirms it (B3-3.2-02).
If most of your wealth sits in savings or investments, an asset depletion loan may let you qualify on those balances.
Documents to gather before you apply
Having these ready speeds up preapproval:
- Your latest pay stub and W-2s (two years’ worth if you earn overtime, bonus or commission).
- Signed tax returns for two years if you’re self-employed or earn rental or investment income.
- Award letters for Social Security, disability, a pension or VA benefits.
- A divorce decree or court order, plus records of six months of support payments.
- Leases for rental property you own.
- An employer letter with your return date if you’re on leave.
Expect two more steps. Fannie Mae requires each borrower whose income is used to sign IRS Form 4506-C, which lets the lender pull tax transcripts (B3-3.1-02). In addition, the lender confirms your job with your employer within 10 business days before closing (B3-3.1-04).
As a next step, gather two years of income records and ask a loan officer to run your numbers before you shop, so you know the income figure the lender will use.
Frequently asked questions
Do mortgage lenders look at gross or net income?
Lenders look at gross income, your pay before taxes and deductions, for W-2 employees. For self-employed borrowers, they use net business income from tax returns.
Can benefits count toward a mortgage?
Yes, many benefits count. Social Security retirement and disability, long-term disability, VA benefits and public assistance can all qualify, each with its own paperwork. That means an award letter or proof of receipt for Social Security, a policy or benefits statement for private disability, and a letter from the paying agency for public assistance. Benefits that end or depend on a dependent’s age, such as survivor benefits, must be shown to last at least three more years. Nontaxable benefits can also be grossed up, which raises your qualifying income.
Do lenders count dividends as income?
Yes, with a two-year history shown on tax returns or 24 months of statements. Also, the lender subtracts any money you’ll use for the down payment or closing costs before estimating future dividends (B3-3.4-08).
What is mortgage differential income?
It is money an employer pays to cover part of the gap between your old and new mortgage payments. Under Fannie Mae B3-3.3-06, the employer must confirm the amount and duration in writing. The payments must continue at least three years, and the full amount is added to your income.
What is qualifying income for a mortgage?
Qualifying income is the monthly amount the lender uses after applying these rules. It can be lower than what you earn, for example when overtime is averaged. It can also be higher, when nontaxable income is grossed up.
