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Question: What is mortgage income? I want to apply for a mortgage but worry that much of my income will not be counted. I receive child support plus much of my money comes from military allowances. How will lenders handle such income when I apply for a mortgage.
Answer: We tend to think of “income” as the numbers which show up on a bi-weekly employment check. For lenders, however, many forms of income are entirely acceptable for mortgage underwriting.
“Income” comes in different flavors. There can be salary, overtime, bonus, and commission income, all of which will delight lenders. However, the list of acceptable mortgage income types is actually much longer. According to Fannie Mae’s Selling Guide, with proper documentation lenders can consider the following other types of income when qualifying borrowers:
- Alimony, Child Support or Separate Maintenance
- Annuity, Pension and Retirement Income
- Boarder Income (restrictions apply)
- Capital Gains Income
- Employment-Related Assets as Qualifying Income
- Foster Care Income
- Interest and Dividend Income
- Long-Term Disability Income
- Mortgage Credit Certificates
- Notes Receivable
- Public Assistance
- Royalty Income
- Section 8 Homeownership Payments
- Social Security Income
- Trust Income
- Unemployment Benefits
- VA Benefits Income (non-education)
- K-1 Income (ownership under 25%)
Other sections of the guide cover auto allowance, military pay, tips, seasonal income and temporary leave, and lenders can count them too with proper documentation.
Taxable and non-taxable mortgage income
Tax questions further complicate the issue of “what is income?” Lenders like to see income that borrowers report on tax forms. Some income, however, is not taxable, so it doesn’t appear on a return. As an example, the IRS says child support is neither taxable to the recipient nor deductible by the payer.
How lenders verify income for a mortgage
From a lender’s perspective “income” is income only if the borrower can fully document it. Lenders have strict paperwork requirements because they have an obligation to verify the ability of all borrowers to repay their mortgages. They do this by creating a careful paper trail showing that at the time of application the borrower was fully qualified for financing.
Consider alimony. According to Freddie Mac guidelines a borrower receiving alimony must provide several forms of supporting documentation, including:
- Evidence that alimony has been paid for at least the past six months.
- Evidence that payments will continue for at least the next three years.
- Copies of the agreement which establishes payments such as a signed court order, legally binding separation agreement or a final divorce decree.
- Evidence of the child or children’s ages when child support is involved.
Strategies
It might seem like paperwork overkill but lenders will be elated if you can show lots of documents to back up mortgage income claims.
Although we live in the electronic age it’s still best to be paid by check. A check shows who paid, the amount involved, and the date.
When depositing income it’s best to have a separate deposit for each check. With a corresponding bank deposit receipt there’s evidence that the money was both collected and deposited.
Mobile check deposits leave a dated record. Many lenders now pull bank-statement data electronically, so deposit each check on its own and keep the deposit confirmation in case the lender asks for it.
Gross-up income
One of the great oddities of “other” income is that sometimes it may be worth more than the amount shown on the check. Here’s how.
When lenders compute your debt-to-income ratio (DTI) they need to know your monthly income. By “monthly income” they mean what you earn before deducting taxes, your gross income. If Stevens gets $1,000 a month in non-taxable pension income, the lender can “gross up” that sum to treat it as though it’s a taxable amount. For example, FHA rules allow a 15% increase to $1,150, and Fannie Mae allows 25%, or $1,250. Both allow more when the borrower’s tax rate is higher. This higher number can make it easier to qualify for financing.
Reductions
If it’s true that lenders can use some non-salary income to boost your qualifying income, it is also true that sometimes you can’t get credit for all that you deposit.
The classic example is rental income. Take in $12,000 a year in rent and lenders may count only 75 percent of the lease amount, or $9,000, before subtracting the property’s mortgage payment, taxes and insurance. If the property already appears on your tax return, the lender instead uses the net rental income shown on Schedule E (with items such as depreciation added back), then subtracts the same costs. How come? Lenders like that you have rental income but they worry that looking forward there may be vacancies and surprise maintenance requirements.
To find out more you need to get pre-approved. Show your documentation to loan officers and ask if there are additional steps you can take to verify income. Also ask about grossing-up and reductions because such calculations can impact your ability to qualify for financing.
