Lenders look for two years of employment history. Loans can be granted without a two-year history on occasion with explanation and documentation. For example, a person who was going to college and now has started a job in the field of study would be perfectly acceptable. Even without the two-year requirement.
If a borrower has been on the same job for more than two years and receives bonus or overtime income, the lender can count it. It’s difficult to count with less than two years on the same job.
Lenders look at W-2 and year-to-date pay stubs to determine income. When self-employed, the lender will ask for two years of tax returns (and corporate returns if used). If someone has been self-employed for five years or longer, then we only need to analyze the most recent return. Lenders look at the bottom line of the schedule C. So if you grossed $80,000 but wrote off $60,000 then in the lender’s eyes, your adjusted gross income is $20,000.
There are some unusual sources of income that lenders can actually use. They are worth explaining.
Lenders use gross wages when qualifying borrowers. Disability income is usually non-taxable and therefore the lender can “gross up” the income. For example, say a borrower received $1500 in disability income, the lender can take 125% of that amount making it $1875 to be used for the purpose of qualifying.
In most cases you cannot use unemployment as income. However, there are circumstances where it is allowed. An example might be a firefighter who works during the summer and then collects unemployment in the winter and has done this for several years. We have a track record of the employment and receiving the unemployment. What lenders cannot do is count unemployment if it’s a single circumstance that’s not verifiable and consistent, for example during Covid you received unemployment – that income could not be counted.
A less common source of income is gift funds. I’ve seen circumstances where a family member has given another family member a gift for two or three years and they write a letter saying that they intend to continue to give gifts in the same amount to the person in the future. Then we verify that the donor has adequate funds to do this. In that circumstance gift income could in fact be counted.
Alimony – separate maintenance and child support can be counted if there is proof of it being received for at least six months. In the case of child support, the income needs to continue for three years. So if you have a 17-year-old and child support ends at 18 years, the lender would not count that income.
You can even count gambling income, if claimed on the tax returns and averaged out over a period of time.
Let’s say you work at a pot shop, can you obtain a home loan? Yes, you can. However, if you own the pot shop, then the lender would not allow that income.
It’s always advisable if alternative income is used for qualifying for a home loan that the mortgage underwriter reviews and approves the sources prior to going out and purchasing a property. Working with a local experienced loan officer will help improve your odds of success!
This information is not intended to be an indication of loan qualification, loan approval or commitment to lend. Loans are subject to credit and property approval. Other limitations apply. Rates, terms and availability of programs are subject to change without notice. State disclaimer: loanDepot.com, LLC NMLS ID 174457. www.nmlsconsumeraccess.org Licensed by the OR Division of Finance and Corporate Securities, Mortgage Lending ML-4972.| WA: Licensed by the WA State Department of Financial Institutions, Consumer Loan Company CL-174457. | ID | CA: Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act CRMLA 4131040.
