When it comes to buying your next home—or buying out your spouse’s half of your current home during a divorce—there are certain income types that most Bay Area mortgage banks use to determine whether you’ll qualify.
Obviously, they’ll accept income from your day job if it’s enough to cover the cost of owning the home, and of course they’ll accept cash if underwriters can trace the funds back to an acceptable source, but if you have multiple income streams, some of that extra money you’re making may not count toward your total qualified income.
To help you get a jump start on your next mortgage application, here are the types of income banks want to see when you apply for a home loan or refinance:
Employment Income: W2 wages from a full or part-time job, military income, and 1099 self-employment income are all acceptable income sources, as long as you can provide a two-year history that proves you can afford to repay the loan. Bonuses and commissions may also count if they’re consistent over a two-year period or trending upward.
To use these forms of income, you must submit pay stubs and appropriate tax documents for the period requested by your loan officer (usually two years). Any changes in income during the application process will need to be documented and confirmed by your employer, even if that change is in your favor (like a pay raise).
Investment Income: Because of the volatile nature of investment income, most banks prefer not to count it as a qualifying income source. However, if investing is your primary source of income, and your income is consistent—as would be the case for day traders—then investment income may qualify. And if you’re of retirement age and you earn dividends or interest income, that may qualify as well.
Some banks may consider restricted stock units (RSUs) as a qualifying income source, if certain conditions apply. Contact your mortgage agent for more details. Here’s more information on RSUs: https://www.merriman.com/wealth-enhancement/using-restricted-stock-units-to-help-you-qualify-for-a-mortgage/.
Rental Income: If you bought into Bay Area real estate as a peripheral income stream, you’re in luck! Rental income, less the cost of property ownership and maintenance, will almost certainly qualify. Assuming your tenants have a solid payment history and there are no liens or judgments against the property, rental income can be a solid qualifier for your new mortgage. But there are certain restrictions, so be sure to consult your mortgage professional or, in a divorce case, consult a Certified Divorce Lending Professional (CDLP).
Gift Money: Gifts are sticky because not every giver is willing to jump through the hoops mortgage banks require. Gift money can be used for a down payment and closing costs on a mortgage loan, but in order for it to qualify, the giver has to be willing to write a letter asserting the gift’s purpose with a promise that the gift doesn’t need to be repaid—and they must open their financial history to underwriting scrutiny for a period of time prior to giving the gift in order to prove the existence of the funds and trace their source. Here are more details on what’s required when using gift money to qualify for a mortgage: https://www.bills.com/mortgage/gift-money-tax-and-mortgage-downpayment.
Child Support and Alimony: Any family support payments that you receive regularly and without default can be used as income to qualify for a home mortgage. You will have to produce a paper trail that proves your receipt and subsequent deposit of your court-ordered support payments over a period of time—often 6 months—as well as prove that you’ll continue to receive the payments for a period of 36 months after the mortgage closes. This is called the 6/36 rule.
Other Qualifying Income: Foster care payments, disability and VA benefits, retirement income, annuities, pensions, social security, and regular payments from a trust fund can all help you qualify for the home of your dreams.
If you’re ready to take the next step, call me. I can help you understand the types of homes that are available in the areas you want to live, and refer you to a mortgage lender that will help you assess how much house you can afford in the Bay Area.