When you apply for a mortgage, your lender is looking to determine one important thing: Can you repay the money they’re lending you?
Determining this answer is the entire point of the underwriting process, and your lender will look at a whole slew of factors in its analysis. Your credit score and debts will play a role, and so will your employment status.
Also high on the list? That’d be your income — both how much it is and the type of income you’re bringing in.
There are several types of income you can use to qualify for a mortgage. With any of them, predictability is the rule of thumb.
So, what types of income can you use to buy a home? Here are eight of them.
What's in this Article?
The most commonly used type of income to buy a home is employee or “W-2” wages — income you earn either from an hourly or salaried job. This income is easily proven to your lender with past W-2s and pay stubs.
You may even be able to qualify without supplying tax returns but the lender can ask for those too.
Lenders also want to see a steady history of employment, usually at least two years. This does not have to be with the same employer, though. You can combine jobs in similar fields and even related education to meet the two-year requirement.
Your mortgage company will sometimes typically ask your employer to verify your current standing via a verbal verification of employment (VOE), or could even request an earnings breakdown by sending your employer a written VOE, especially if you earn extra income like bonuses, overtime, or commissions. More on these income types next.
If you get annual bonuses, commissions, or you work overtime, these income types can be used to qualify you for a mortgage. In this case, you’d just need to establish a history of receiving those payments.
For bonuses, that might mean a pay stub from the last two Decembers showing your bonus amount year-to-date totals for the year.
If you don’t keep paystubs that long (who does?), then the written VOE will come in handy. The VOE breaks out base pay, overtime, commissions, and bonus for the current year, plus the prior two years. Lenders must average out at least 24 months of these income types, and this form makes it easy for them. The lender (not you) sends the form to your human resources department, which completes it and sends it back.
The image below is the section of the VOE that breaks out your various types of income.
The written VOE saves you time and effort tracking down old paystubs or bonus statements.
Commissions are easy to verify with this form as well. If you’ve had multiple sales jobs in the past two to three years, you’ll need to provide your lender with contact information for each employer. Then, the lender will get a VOE from each one and average all commissions or other income types over the past 24 months, or the full amount of time that shows on the VOE if it shows a longer history.
Tax returns and W-2s can help here, too — lenders may want to see substanting documents to verify what is shown on the VOE. W-2s and tax returns won’t break out the income like the VOE, but they should verify the totals.
If you’re self-employed, a freelancer, or a contractor, you can certainly use those earnings to help qualify you for a loan, but keep in mind: Documentation and history will be key.
You’ll need to establish a trend of income so that the lender can accurately gauge how much you’ll stand to earn in the coming years and whether it’s enough to comfortably cover your mortgage payment or not.
The lender will require tax returns first and foremost. There are niche programs that only require bank statements to prove income, but those likely come with higher rates. Generally, you’ll need to provide tax returns.
But this is where it gets tricky. There are a couple of “gotchas” on tax returns that you should be aware of.
First, underwriters will look for a declining income trend. For instance, if your adjusted gross income was $100,000 in 2019 and $60,000 in 2020, that could be a red flag. And in the pandemic era, this scenario is not uncommon.
To help your cause, provide a profit and loss statement (P&L) for the current year, certified by your accountant, showing earnings are back up to pre-decline levels. Then write a good letter of explanation showing why your income went down, that it was a one-time event, and your business is and will continue to operate at normal levels.
Second, be aware of write-offs. Lenders can only use income after claimed expenses. So if you brought in $80,000 as an Uber driver, but wrote off $60,000 in expenses, the lender can only use $20,000 as your annual income (very hard to qualify with that income!).
As a self-employed worker who plans to buy in the next couple years, be aware of your deductions and expenses. Leave enough taxable income on your returns to qualify for a mortgage a couple years down the road.
If you earn money from investments, like stocks, bonds, or real estate, income and dividends from these assets can be used to qualify as well.
You’ll usually need the most recent statements from those accounts, as well as at least a two-year history of receiving income from that investment. You will also need tax returns that document your investment income.
If you receive dividend income from an account, try to leave that intact. If you use any for downpayment, the lender will lower your projected dividend income accordingly.
If you have a disability and are unable to work, you may be able to use your disability benefits to qualify for a mortgage loan. This can include both long-term disability income from your employer or an insurance company or Social Security Disability Insurance (SSDI).
As with other types of income, the key here is documentation and history. You’ll need to provide a benefits statement or a copy of your disability insurance policy, or in the case of SSDI, your Social Security award letter.
Unlike many types of non-employment income, you typically do not have to prove SSDI income will continue.
If you receive Social Security income, those payments can be used as income on your mortgage application, too. Your lender will look at both how long you’ve been receiving Social Security (and how long it’s expected to last), as well as how much you’re receiving.
In some cases, you may be able to qualify on your Social Security income alone, or you may need other forms of income to supplement it.
If you plan on using Social Security income to qualify for a mortgage, you’ll need to submit several types of documentation, including:
- Your annual Social Security award letter
- Bank statements showing the payments deposited into your account
- Tax returns showing your total income
Child support, spousal support, and alimony payments can count as income and be used to qualify you for a mortgage loan. You must be able to provide proof that the payments are slated to continue for at least three years past your loan’s closing date.
Lenders also may request proof that you have been receiving payments, since parents don’t always pay the court-ordered child support.
Your lender may also request a divorce decree or child support order as proof of the income and the term of those payments.
Keep in mind that you never have to reveal child support or alimony income when applying for a loan, only if you want to use that income to qualify.
To use rental property income, you’ll need to have existing rental properties with a documented history of earned income over the last two years (proof of rent payments deposited in your accounts, tenant history, etc.). You can then use that income to qualify you for financing on a new house — one you plan to live in.
But it works both ways: if you’ve lost money on your rentals, the loss will be deducted from your other income.
If you are buying a second home you plan to rent out when you’re not using it, such as a vacation home, you cannot use those potential rents to qualify. You can only use future rents on investment property loans, which typically come with higher interest rates and much stricter qualifying requirements.
Potential Airbnb rents also can’t help you qualify for a vacation or second home mortgage either. Again, this would need to be an investment loan if you plan to use future rents as income.
What income can be used to qualify for a mortgage? FAQs
Many types of income can be used to help you qualify for a mortgage. W-2 wages, self-employment earnings, investment dividends, Social Security income, Social Security Disability Insurance, and child support and alimony payments can all help you qualify as long as you have a documented history of the income.
Income is only part of the equation. Your down payment amount, debt-to-income ratio (DTI), and interest rate will play a role, too. Try using a home affordability calculator to get a sense of what might be available to you in terms of budget. The best way to find out how much you can afford, however, is to get preapproved for a mortgage.
In most cases, you can’t use unemployment income to help you qualify for a mortgage loan. There are a few exceptions, though. Seasonal workers, for example, may be able to if they can document a history of both earned wages and unemployment income over a series of years.
If you were previously on unemployment and are now employed, there’s also a chance your lender can consider that past unemployment income as part of your application. Talk to a loan officer if you’re in this situation.
To qualify for a mortgage, you’ll need to meet the credit score, debt-to-income, and other requirements set for your mortgage program. You will also need to show you have enough income to comfortably afford your projected mortgage payment for the foreseeable future.