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 with proper documentation lenders can readily consider the following types of income when qualifying borrowers:
- Alimony or Child Support
- Automobile Allowance
- Boarder Income (restrictions apply)
- Capital Gains Income
- Disability Income – Long Term
- Employment Offers or Contracts
- Employment-Related Assets as Qualifying Income
- Foreign Income
- Foster Care Income
- Housing or Parsonage Income
- Interest and Dividend Income
- Military Base pay, flight or hazard pay, rations, clothing allowance, quarter’s allowance, and proficiency pay
- Mortgage Credit Certificates
- Mortgage Differential Payments Income
- Notes Receivable
- Public Assistance
- Retirement, Government Annuity, and Pension Income
- Seasonal Income
- Social Security Income
- Temporary Leave Income
- Tip Income
- Trust Income
- Unemployment Benefits
- VA Benefits Income (non-education)
Taxable and non-taxable mortgage income
The issue of “what is income?” is further complicated by tax questions. Lenders like to see income which has been reported on tax forms but some income is not taxable so it’s not reported. As an example, Nolo.com explains that child support is neither taxable nor deductible.
Document, document, document
From a lender’s perspective “income” is income only if it can be fully documented. 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.
Cell phone deposits make it easy to document payments by check. The check comes in, the front and back are scanned for the deposit, and a notice of approval is received by email. Print out the approval and you have both the physical check and dated evidence of the deposit. Lenders will love 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 they have to “gross-up” that sum, to treat it as though it’s a taxable amount. They might increase the amount for qualification purposes to $1,150 or $1,250. This higher number will make it easier to qualify for financing.
Reductions
If it’s true that some non-salary income can be used 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 in profits from a rental property and lenders are likely to see only $9,000 – a 25 percent reduction. 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.
