Lift your qualifying income

We previously assumed that your qualifying income totaled $7,000 a month. That was simple. In the real world, lenders qualify you according to a variety of actual and potential income sources such as:

  • Salary
  • Hourly wages
  • Overtime
  • Bonuses
  • Commissions
  • Scheduled raises
  • Alimony
  • Welfare/ADC
  • Pension
  • Tax-free income
  • Child support
  • Social Security income
  • Unemployment insurance
  • Self-employment
  • Moonlighting/part-time job

♦ Tips

  • Disability insurance
  • Dividends
  • Interest
  • Consulting
  • Rents (received from rental units you own or are buying)
  • Annuities

Look through this list. Is your total income set precisely? Consider overtime, bonuses, commissions, self-employment, and tips. Over months or years, these amounts could jump up or down.

Or think about unemployment insurance. How could someone who's unemployed (or expects to become unemployed) hope to qualify for a mortgage? Well, I know a savvy loan rep who routinely gets unemployment insurance counted. His borrowers work during summer stock theater for good wages. Then during the off-season they collect unemployment. So, their qualifying income includes both their earnings from theater and their regular checks from the state unemployment insurance.

Remember, too, if you buy a two- to four-unit property, a lender will count 60 to 100 percent of your potential rent collections as part of your qualifying income. Typically, though, to count rental income you will need to provide the lender copies of the leases the existing (or to be) tenants have signed. For larger rental properties, lenders use a debt coverage ratio (DCR). To calculate DCR, divide aproperty's yearly net rental income (i.e., rents less property taxes, insurance, and operating expenses) by the total annual mortgage payments.

For example, assume a rental property's rental income (net of operating expenses) is expected to equal $50,000 per year and mortgage payments will total $40,000 per year. In this example, the DCR would equal 1.25 (50,000 ^ 40,000 = 1.25). Typically, lenders prefer DCRs—depending on the type and quality of the property—in the range of 1.1 to 1.5.

Regular, Stable, Continuing

Lenders will count any income that you can show as stable, regular, and continuing. Usually, a two-year history with a realistic future is enough to satisfy a lender. On the other hand, what if during the past five years you've typically earned sales commissions of $4,000 a month, but during the past 12 months your income jumped to $6,000 a month? Now, you must persuade the underwriter that your more recent earnings better reflect your future earnings.

Or consider alimony or child support. You possess a court order that requires your ex-spouse to pay $1,500 per month. But sometimes you get paid; sometimes you don't. So, what amount will the lender count? This is a judgment call. How well can you explain away your ex's past irresponsibility? How persuasively can you show your ex will forever after pay as required?

Future Earnings

Sometimes lenders accept future earnings that may lack a past or a present. Imagine your spouse has just taken a new job in Topeka. You previously worked as a teacher but, for family reasons, took a leave of absence for the past two years. After your family gets settled in this new community, you again plan to teach full-time. Will the lender count these future earnings? With a good argument and evidence of intent, you can probably get at least part of this potential income included. In fact, Fannie/Freddie both issue liberal guidelines for "trailing spouses."

Recent college graduates or recent graduates of professional schools such as nursing, law, medicine, business, or engineering can also secure mortgages without immediate past or present income or employment. A contract for a new job may work to establish your qualifying income.

When Current Income Doesn't Count

For the past 12 years, you worked as a master mechanic at the local Ford dealer. You earned $5,350 a month. Then, six months ago, you got hooked on Amway products. You quit your job at Ford, and became an Amway sales distributor. Business was slow at first, but during the past three months you've cleared close to $25,000.

Will this income qualify? Sorry, your newfound success would not impress most lenders. They would tell you to reapply after proving your Amway sales skills for another 18 to 24 months.

Maximize Your Qualifying Income

To secure loan approval and maximize borrowing power, present your income history, current earnings, and future prospects as optimistically as possible. You must anticipate and respond effectively to any negative signals that may cause the lender to doubt the amount, stability, or continuing nature of your income.

If your earnings fell last year because you went back to school to gain education that will lead to a raise or promotion, make sure you tell the loan rep. If you earned $60,000 last year, but as of October 1 of this year you've taken in only $40,000, show the lender that your big earnings season runs from October to December. Provide evidence that typically you earn 40 percent of your yearly commissions during these three months, so you will actually exceed last year's income.

If self-employment earnings complicate your income, explain thoroughly. For complex situations, enlist your accountant. For example, show that your tax losses are matched by positive cash flow or strong business profits. You might point out that you draw a small wage or salary from the business to minimize your personal income taxes. Some loan reps won't understand these issues unless you guide them to the result you want.

Without a guide, some loan reps will figure your income too conservatively. They follow rules such as, "When in doubt, leave it out." Or, consider the two earnings patterns shown in Table 2.2.

Each of these earnings patterns shows average annual earnings of $45,000, and, respectively, recent earnings of $50,000 and $40,000. Common logic might hold that lenders would use a consistent method to calculate qualifying income from each of these patterns. But no. Without persuasive evidence from each borrower, the lender would probably qualify Jack using the three-year average of $45,000; and to qualify Jill, the

Table 2.2 Earnings Patterns

Year Jack Jill

Overcome the Negatives

2001 2002 2003

  • 40,000 45,000 50,000
  • 50,000 45,000 40,000

loan rep would use the most recent income of $40,000.2 Why? Play it safe—unless you provide a realistic rationale.

Put Positives in Writing

Talk is cheap. Explanations sway hearts and minds only if put on paper. Lenders follow this rule: "If it's not in writing, it doesn't exist." Loan reps and underwriters need "protect your job" paperwork piled higher and deeper.

A paper trail doesn't just protect the frontline lending personnel. It protects lenders against repurchase requirements that Fannie, Freddie, or the mortgage insurer (or guarantor such as FHA, VA, or PMI) may impose on them. If a lender strays too far from secondary market guidelines, the buyer of the loans it sells may toss the losses back to the careless lender.

Also, nearly all lenders today monitor loan quality and file data integrity through internal audits. Without the paperwork necessary to justify their loans, the lender could run into trouble with regulators, stockholders, or bank insurers such as the Federal Deposit Insurance Corporation (FDIC). If you want a lender to view your past, present, and future income more favorably than it would otherwise, write out and deliver your evidence— before the loan rep and the underwriter formally review your application.


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  • malva underhill
    What is qualifying income for mortgage?
    8 years ago
  • Doreen
    How lender consider overtime in to your income?
    8 years ago

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