What Income is Considered When Buying a House?


Mortgage rates are at historic lows, so now’s as good a time as ever to take the plunge and purchase your first property or buy another home. Since job stability and regular income are paramount if you’re thinking about a home purchase, make sure you have your financial house in order before meeting with a mortgage lender.

Good credit helps you qualify for a mortgage and receive a low interest rate, but lenders also evaluate your income to determine how much you can spend on a house. For that matter, you need to know which types of income a lender uses when qualifying applicants.

1. Salary/paycheck

If you’re an employee and receive a W-2, your mortgage lender needs documented proof of this income. This includes copies of your tax returns from the past two years, as well as paycheck stubs for the past 30 to 60 days.

Typically, you must be gainfully employed for a minimum of two consecutive years to qualify for a mortgage. If you switch jobs during this two-year period, you must remain in the same field and your income must stay the same or increase. It’s important to note that a lender qualifies you based on regular income, not overtime pay. Since overtime pay can change from week to week or month to month, lenders don’t consider it a reliable source when determining mortgage affordability.

2. Self-employed income

Although it’s more challenging for self-employed people to qualify for a mortgage, a home loan isn’t unattainable for these borrowers. The key is good record keeping and providing the lender with sufficient proof of income.

If you are self-employed and don’t receive income from an employer, lenders will rely solely on information in your tax returns to qualify you for a mortgage. You’ll need to provide two years of complete tax returns including all schedules. Lenders use your income after business expenses or deductions to determine how much you can afford to spend on a house. Therefore, you might limit your number of tax write-off’s for two years prior to purchasing a home. Write-offs reduce your taxable income, which can make it appear that you earn less than you do.

3. Military income

If you’re active-duty military, you can also use this income for qualifying purposes. In addition to your regular salary, your lender will count any housing and food allowances you receive as income.

4. Child support and/or alimony

Support payments also count as income when applying for a mortgage loan. There are, however, stipulations for using this income. Typically, mortgage lenders only count this income if there’s a court order and you have written documentation confirming the amount you receive each month. In addition, you must provide a paper trail showing that you’ve been receiving support payments on a consistent basis for the past six months to 12 months. Keep in mind that some lenders will only consider support payments if you’ll continue to receive this money for a minimum of three years after closing. Since requirements vary by lender, talk to your loan officer for more information.

5. Other income

After retiring, income you receive from Social Security benefits or a retirement plan (such as an individual retirement account, pension or 401(k)) also counts as regular income when applying for a mortgage. You can also use income you receive from rental property, as well as any interest and dividends you receive from a bank account or company