2. How often do you get paid?
Are you paid every week, every two weeks, twice per month, or monthly? This may seem irrelevant, but here's an example of why it's so important:
Let's say you get paid $2,000 every other Friday, but you say you earn "around $4,000 per month." If the lender mistakenly assumes you get paid twice a month, then the mortgage underwriter will use $48,000 per year to qualify you for a home loan.
But if you are actually paid biweekly, you probably qualify for a higher monthly payment. The lower figure shorts you about $300 per month worth of income because when you get paid every two weeks, you get 26 paychecks a year (versus 24 paychecks a year when you're paid twice a month).
The difference is important. Depending on the mortgage interest rate, that extra $4,000 per year could help you qualify for a fixed-rate mortgage that's $20,000 bigger.
Another way to look at it is that the higher income can help you qualify for another $100 per month on your monthly mortgage payment. That might be enough to help cover a homeownership expense, such as your:
3. What's the deal with the ups and downs?
If you've experienced a big drop in income from last year, the underwriter may use the lower of the two years to figure out how much mortgage you can qualify for.
Did your income skyrocket from last year to this year because of big commissions? That's great, but when there is a significant increase, the underwriter may take the average of the two years.
If you can show a change in your base pay, like a salary increase, then you can use the higher income right away. Also, if you have experienced a change in income of more than 10% year over year, expect the loan officer to ask for a letter from your employer's human resources department explaining the reason for the change, especially if it was due to a promotion or new position within the company.
4. Are you new on the job?
So long as you're getting paid a salary or a full-time hourly rate, being new on the job is not really that big a deal. Don't think you can't get through the loan process because you started a new job; that's just not the case. But depending on your situation, you may need to provide additional information to the underwriter.
If you are a recent college grad, you may be asked to show a copy of your transcript to verify that your degree is related to your new job.
If you recently started a new job, it may be easiest to wait for your first paycheck before you apply for loan approval, and in some cases, your first two paychecks. There are some cases where a lender might let you close your loan without that first paycheck, but you'll need a fully executed employment contract and possibly some other documentation.
Career changes can be a little bit more complex, but if you can explain the nature of the position and its relation to your skill set, and the new career involves a salary or full-time hourly pay, you'll probably be OK to qualify for a mortgage. The lender is looking for income stability. So if you used to work in accounting and now you make your living as an aesthetician, that could be a red flag. The mortgage lender might need to see a period of job stability before approving your loan application.
5. Are you paid commission, or do you have reimbursed expenses?
If you earn commission, you'll need to provide two years of complete federal tax returns, including all schedules, as part of your loan application. The lender is going to look for any unreimbursed business expenses. Those will be deducted from your gross commissions to find your net commissions. The loan officer will then take the average net monthly commission for the past two years.
The section of the tax return that will be scrutinized is the 2106 expenses. At tax time, these are expenses that reduce your taxable income, which is welcome news.
At mortgage application time, however, these expenses are essentially treated like debt. If you write off $12,000 per year in nonreimbursed expenses for meals, entertainment, mileage, dues, subscriptions, equipment, etc., then guess what? That's $1,000 per month of payment liability that will be counted against your income.
6. Where's this other money from?
Income doesn't have to come from a paycheck. You can use other types of income to qualify for a mortgage. Here are a few examples:
- Self-employment
- Alimony
- Child support
- Pension
- Social Security
- Some kinds of disability
- Annuity
- Investment income
- Rental income
In all cases, you'll need to document the income and source.
You'll also need to document any large and unusual recent deposit to your bank account. It doesn't have to be verified as income, though. If it was a gift to help you buy the home, the giver will need to write a letter. If it was cash assets that you moved from another account, you'll need to show the relevant statements.
Final points
In addition to answering the above questions, you'll want to keep the following points in mind.
Changing jobs during the loan process
If you are thinking about changing jobs in the middle of the mortgage process, make sure you let your mortgage professional know. Lenders will check your employment status at the beginning of the process, in the middle, and the day you close on a house. So last-minute changes in employment could jeopardize your mortgage approval.
Applying with a co-applicant to qualify for more
If you don't have enough income on your own, some loan programs let you add a relative's income to help you qualify even if that person doesn't plan to live in the house. This is a great way for a parent to help an adult child buy their first house. That family member will be on the hook for the mortgage, though, and it will count as a new payment on their credit report no matter who is making the payments.
Qualifying for a mortgage without income documentation
Keep in mind that questions about your income depend on the loan program you apply for. Some types of mortgage loans, such as a stated income mortgage loan, may not require income documentation. If you think you'll have trouble answering all of the above questions, or you prefer to qualify for a mortgage in another way, you may want to talk to at least one other potential lender. The right lender can help you figure out which loan option is right for your situation.
Preparation is the key to success
One final point about income: You only get one chance to make a first impression. It may seem like mortgage underwriters look for reasons to turn down loans, but the truth is they like to have all the facts in front of them regarding how much you make, with details and explanations to address any changes. The extra work it takes to provide all of this information up front often means the difference between a painless mortgage approval and a document-hunting nightmare.
Still have questions?
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