Qualified Income Mortgage Guidelines

In this guide, we will cover qualified income mortgage guidelines. We will discuss what qualified income is and what constitutes qualified income by mortgage underwriters. There are various factors that are taken into account when qualifying for a residential mortgage loan.  There are certain types of income that can and cannot be used. Only qualified income can be used by lenders. John Strange, a senior loan officer at Mortgage Lenders for Bad Credit says the following about qualified income:

Qualified income is income that can verified and sourced. Cash income and alternative types of income is not considered qualified income, therefore cannot be used. Any income  without a paper trail or cannot be documented cannot be used as qualified income.

Qualified income is key when it comes to the income that can be used and counted towards calculating debt-to-income ratios by mortgage underwriters. Qualified income for mortgage loan qualification is important in the calculation of debt to income ratios by underwriters. In the following paragraphs, we will cover the types of income that is considered qualified income and can be used in the mortgage process..

What Makes Income Qualified Income?

Qualified income is the income that a borrower can repay in the eyes of a mortgage underwriter. It qualifies as income that meets the criteria, making it qualified income. This criterion refers to trustworthy income that can be predicted and stable for a minimum of three years. The definition can shift with the loan type (conventional, FHA, USDA, VA), which makes and breaks the definition. Still, it remains the secured foundation principle in every program.

 

Here is a summary breakdown of what meticulously practiced underwriters mark as qualified income:

The Most Important Qualifiers To Be Classified as qualified income

• Stable: Reliable over time—has a history of two years of income and the papers confirming it (tax returns, W-2s, payslips).
• Predictable: This means the value is consistent with the regular intervals. Unlike random fluctuations, everything is structured and can change as long as it is averaged properly.
• Likely to Continue: The ability to demonstrate that the assumptions can be true for at least 3 years after the closing of the loan after an open has been taken.

Type of Qualified Income Groups

Wage and Salary Income

• Full-Time Employment Income: It was performed by a salaried employee. It should be checked by looking at another 30 days’ pay stubs and 2 years’ worth of tax return W-2s.
• Part-Time Employment: This is valid if guaranteed, such as 20 hours a week for two years, which means it is expected to be conceded long-term.
• Overtime and Bonuses: These are included only if they were consistently received for two years. Underwriters tend to smooth out or average the figures over that period. Usually, bonuses are assumed.
• Second Jobs: Acceptable once primary employment has been maintained for at least two years, although some lenders might consider one year with sufficient primary employment.

Self Employment Income

Income from a business (sole proprietorship, partnership, LLC, corporation) qualifies if:

• The borrower has two or more years of self-employment experience within the same line of business.
• Tax filers (Schedule C, 1040, K-1s) indicate earnings are being realized.
• The net income post expenses is steady or increasing.
• If declining, this could raise some eyebrows.
• Underwriters normally smooth over two years’ net income while adjusting for depreciation or non-recurring losses… usually.

Investment Income

• Interest and Dividends: Acceptable if recorded for two years via tax returns or 1099s, in addition to documented ownership of underlying assets after closing.
• Rental Income: Net rental income (gross rent less mortgage, tax, and insurance) from investment properties is acceptable where there are:

1. A two-year supporting lease and tax return (Schedule E).
2. In the case of new leases, a signed lease agreement alongside a payment receipt may be considered valid documentation.
3. It is important to note that some lenders may apply a vacancy factor (e.g., 75% of gross rent).

• Capital Gains: These are considered only if they are recurrent and expected to continue (for instance, from ongoing asset divestiture over two years), excluding non-recurring instances.

Retirement and Pension Income

• Social Security: Fully qualified (the total amount before Medicare deductions) is accepted as long as award letters or bank statements indicating deposits document it.
• Absent specification assumes indefinite duration unless stated (SSDI with a term limit).
• Pension Income: Accepts only if fixed and permanent, proved by award letters or 1099-Rs.

401(k)/IRA Distributions

Qualifies if:

• Received consistently for two or more years or
• A regular withdrawal setup containing sufficient assets to maintain payments for at least three years, calculated through account balance and traditional withdrawal rate.

Alimony, Child Support, and Separate Maintenance

Accepts provided that:

• Candidly documented and supported with a court order (divorce decree, separation agreement).
• Sustained over six months (12 for some lenders) and proven through bank statements or checks.
• Anticipated for no less than three years following closing (child support may not qualify if close to 18).

Military Income

• All Base pay, allowances like BAH, BAS, and even hazard pay are accepted if consistent and documented via an LES (Leave and Earnings Statement).
• If verified by an award letter, permanent (not temporary) VA disability benefits are included.

Other Income Sources

• Trust Income: This qualifies if fixed, guaranteed for three years, and supported by a trust agreement.
• Disability Income: Payments from long-term disability award letters or payment history are accepted. Short-term disabilities likely don’t count.
• Public Assistance: Counted if consistent, documented, and expected to continue, such as housing vouchers under certain programs like Section 8.
• Royalties: This qualifies if it is expected to be received for two years (for example, from intellectual properties) and is assured to continue.

Income That’s Typically Excluded

• Unverifiable Income: Tips or cash payments that don’t have documents proving them (such as unreported taxes) are not accepted.
• Temporary or One-Time Income: Unqualified are short gig works, gifts, lottery winnings, or any work that doesn’t have a 2-year bear history.
• Future Income: Unless there is a clear proposal stating the funds will become effective within 60 days, deemed strong, convincing documents regarding job offers, raises, and advancements before the date can be accepted from some lenders.
• Non-Occupant Co-Borrower Income: These types of income don’t contribute to the qualifying ratios unless the co-borrowers are willing to live in the house, which is room for an open framework from FHA.
• Reimbursements: Earning stipends, expense reimbursements, or per diem payments do not contribute to income.

Specifics Per Loan Type

• Conventional Loans (Fannie Mae/Freddie Mac): Most income types have a strict two-year history policy. However, there is some lenience, such as a year for self-employed individuals with prior experience.
• FHA Loans: FHA Loans are more forgiving. Suppose stability is shown and the borrower possesses applicable skills. In that case, they might consider lesser periods, like a year of self-employment.
• VA Loans: Emphasis on residual income, military benefits, and a shorter employment history may suffice with proof.
• USDA Loans: USDA loans are more lenient but focus on household income caps. Cyclical income may be accepted if averaged over two years.

Required Papers

Understanding income as specified, underwriters require the following:

• Current pay stubs (for the last month).
• W-2s and tax returns (last two years).
• Bank statements showing income’s source (e.g., alimony or rental earnings).
• Verification letters (for Social Security, pensions).
• Written Verification of Employment (VOE) with employers.

Case Scenario Mortgage Example

For a self-employed general contractor, income earned from gut rehabs, construction, and various trade services qualifies your income for mortgage purposes if:

• A Schedule C tax return is available for two years, indicating stable or increasing net income.
• Ongoing work is supported with contracts or invoices.
• Your business outlook suggests income will continue.
• If you have rental income, this can also be enhanced with a lease via Schedule E.
• Underwriters consider stable, predictable, and sustainable income for three years qualified.
• Your individual scenario—whether employed full-time, self-employed, or a combination of both—dictates what qualifies, but the emphasis remains on evidence and duration.

To apply for a mortgage, prepare records covering two years and document steady income inflows to strengthen your position.

Qualified Income Mortgage Guidelines

To be considered qualified income, the income needs to continue for the next three years. There are many types of income that can be used as qualified income in the mortgage process: Examples of qualified income are the following:

• Social security income
• Pension income
• Part-time income
• Bonus income
• Seasonal income
• Child support
• Royalty income
• Other sources of qualified income in mortgage qualification

Gaps & Extended Periods Of Unemployment

Borrowers who have been unemployed for 6 months or less have no waiting period to qualify for a mortgage as long as they have a new full-time job.

• Borrowers do not have to be with the same place of employment in the past two years
• Borrowers do need an overall two-year employment history
• Borrowers can have multiple employers in the past two years
• Borrowers can have gaps in employment and qualify for a mortgage loan
• Borrowers who started a new job with a new employer, will qualify for a new mortgage by providing a recent paycheck stub and offer letter of employment
• Lenders can get a verification of employment from the human resources department stating that the chances of future employment and the likelihood that the employee will be employed for the next three years are good

Borrowers who have been unemployed for more than six months need to be on the new job for at least six months before they can qualify for a mortgage loan.

Can Borrowers Use Part-Time & Bonus Income to qualify for a mortgage

Part-time and bonus income can be used as an additional monthly income if and only if the mortgage loan borrower has been receiving part-time income and/or bonus income for the past 24 consecutive months and is likely to continue for the next three years. Part-time and/or bonus income that is not quite 24 months might be used if the mortgage loan borrower can get a letter from human resources stating that the borrower’s part-time position is likely to be promising for the next three years. Many human resources departments will be hesitant in stating such verbiage on verification of employment.

Child Support, Royalty Income, And Other Non-Traditional Income

Child support income, alimony income, royalty income, and other non-traditional income can be used as qualified income in mortgage qualification. Other income such as monthly subsidies from lawsuits can be used as additional monthly income in mortgage qualification as long as it will continue for the next three years. Proof and letters of verification will be required

Is Social Security, Pension And Disability Income Considered Qualified Income

Social security income and pension income can be used for income in mortgage qualification. Social security income is normally grossed up by 15% on FHA Loans. Conventional and VA loans allow 25% grossing up of social security income. For example, if the borrower’s social security income is only $1,000 per month, that income can be grossed up by 15% to $1,150 and be used as qualified income in mortgage qualification purposes on FHA loans.

If pension income is not taxed, your pension income can be grossed up by 15% as well and used as qualified income in mortgage qualification. Permanent disability income can also be used and grossed up. FHA loans can be grossed up by 15%. VA and Conventional loans can be grossed up by 25%.

Mortgage borrowers who have non-traditional types of income and need to qualify with a direct lender with no lender overlays, contact us at Mortgage Lenders for Bad Credit at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

How Mortgage Underwriters Calculate Income And Liabilities

Factors such as income, credit, assets, debt, and liabilities together with income are all important factors when qualifying borrowers for mortgage loans. Income for mortgage loan qualification and the credit profile are the two most important factors that will decide whether borrowers qualify for mortgage loans. Income is much more important than credit. Borrowers with low credit scores and poor credit can qualify for home loans. However, borrowers with no income but phenomenal credit will not qualify for a mortgage loan. Lenders want to know borrowers’ ability to repay their home loans and the only way to prove it is with documented income

Types of Income That Can Be Used As Qualified Income by Mortgage Underwriters

There are various types of income that can or cannot be used as qualified income for a residential mortgage loan. There are various types of income wage earners are paid. However, not all types of income is considered qualified income by mortgage underwriters. 

• Cash income
• Commission income
• Bonus income
• Full-Time income
• Part-Time income
• Self-employed income
• Asset income
• Social security income
• Pension income
• Disability income
• Unemployment income

Definition Of Qualified Income By Lenders

In the following sections, we will be discussing and covering the various types of incomes borrowers may have. We will discuss how mortgage lenders view the different types of income when qualifying for a mortgage.

Cash Income By Borrowers

Cash income cannot be used under any circumstances unless it is declared on income tax returns for the past two consecutive years. Cash and undocumented income are worthless in the mortgage world. Many folks in the restaurant and hospitality business do get legitimate cash gratuities. However, that type of income cannot be used as income for mortgage loan qualifications

W2 Full-Time Income

W2 income is the best source of income that is acceptable. Borrowers who are full-time wage earners with full-time income get W2’s at the end of the year. Two years worth of W2’s and the most 30 days recent paycheck stubs is what most mortgage lenders will use to qualify income for mortgage loan qualification purposes

Self-Employment Income

Self-employment income can be used for mortgage loan qualifications. However, the lender needs at least a two-year tax history on self-employment income. Those who write many items and have negative income, will not qualify for a mortgage loan. Many self-employed folks get a salary or hourly wage from their company and give themselves a paycheck every week. They get W2’s at the end of the year like working as an employee for a company. In cases like that, they can qualify their W2 income to qualify for a mortgage loan but need to own less than 25% of the company. Self-employed borrowers who own 25% or more of their business the underwriter will need the business tax returns as well. Taking huge losses on their company tax returns and giving themselves a salary will not work.

Asset-Based Mortgages: Income Derived From Assets For High Net Worth Borrowers

Borrowers who do not have a job and the only income is from their investments, we have mortgage loan programs that are called Asset Depletion Mortgage Programs. Borrowers who have a substantial investment account whether it is cash, securities, or retirement funds, can take 5% of their assets and use that as their annual income. For example, for borrowers who have a $1,000,000 securities investment account and have no other income, we can take 5% of the $1,000,000 which is $50,000, and use that annual income.

Social Security Income

Social security income can be used as income and in most cases, Social security income can be grossed up by 15%. For example, if a borrower has a net social security income of $1,000, their social security income can be grossed up to $1,150.

Qualifying For A Mortgage With Pension Income

Pension income can also be grossed up by 15% like social security income if it is not taxed.

Bank Statement Mortgage Loans

The days of no documentation mortgages and stated income mortgages were dormant since the real estate market crash but is not back. NON-QM loans and Bank Statement Mortgage Loans for self-employed borrowers is one of our most popular loan programs at Mortgage Lenders for Bad Credit. NON-QM Loan is a large part of our business.

Non-QM Mortgages One Day Out of Bankruptcy and Foreclosure

There is no waiting period after bankruptcy and/or foreclosure with NON-QM loans. Bank Statement Mortgage Loans For Self Employed Borrowers is very popular for business owners or self-employed borrowers who take substantial deductions on their tax returns. Either business or personal bank statements can be used for our bank statement mortgage loan program. 24 months of bank statement deposits are averaged to derive income. 100% of deposits are used if personal bank statements are used. 50% of deposits are averaged for the past 24 months if business bank statements are used.

Importance Of Qualified Income

The main reason why qualified income is so important is due to the fact that the lender needs to be convinced that the borrower has the ability to repay their mortgage loan. Lenders want to make sure that borrowers can make their monthly mortgage payments and not default. I have seen many cases where borrowers have a successful business, tons of assets and cash, credit scores over 800, and then get denied for a mortgage loan due to the fact that they had substantial losses on tax returns. Marga Jurilla, the executive assistant at Mortgage Lenders for Bad Credit explains the importance of qualified income as follows:

Bank Statement Mortgage Loans is now an option for self-employed borrowers. However, I can get mortgage loan borrowers with credit scores as low as 500 FICO with open collections, late payments, prior bankruptcy, prior foreclosure, judgments, and charge-offs approved for a mortgage loan.

This holds true as long as they have a documented income that can be verified by the IRS. Home Buyers looking to get qualified with a mortgage company licensed in 48 states with no lender overlays please contact us at 1-800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays. No overlays on FHA, VA, USDA, and Conventional Loans. Mortgage Lenders for Bad Credit also has dozens of non-QM and alternative mortgage loan programs.