A mortgage is a big investment for you and your lender. Because it is probably one to the largest purchases you will ever make, banks and lenders consider multiple factors when considering you for a mortgage. However, one of the biggest factors is your income. Before you apply for a loan, be sure to think about these seven key questions first:
What Type of Income Does a Lender Consider When Evaluating My Application?
A lender would consider as part of your income your regular earnings along with bonuses, overtime, and commissions that you regularly receive. In other words, any item that is not recurrent would be excluded because the creditor wants to see a historical pattern in your income before considering it during the application review process.
The lender may ask you to provide things like W-2s, recent pay stubs, and tax returns for the last two or three years, so that your earnings and their historical pattern can be verified.
Do Lenders Take Second-Job Income Into Account?
Yes, they do as long as long as they can verify that you have held that second job for at least one year.
Are Retirement Earnings Considered During the Application Process?
A lender generally accepts retirement earnings and Social Security checks as valid income. But you may have to submit recent copies of your bank statement or pension check stubs, so that the creditor can verify your income further. Two or three months of income paperwork generally are the norm when a lender reviews earnings from retirement sources.
I Have Rental Income. How Would a Lender Verify That?
If you own a rental property from which your earn money, you certainly report that income to the Internal Revenue Service by completing Schedule E – Supplemental Income and Loss on your Form 1040. Show that schedule and related tax return to the lender. The creditor will review your rental income and expenses and take your net surplus into account when reviewing your mortgage application. Note, though, that the mortgage underwriter will exclude depreciation from your expenses because it is a paper loss, not a "real" loss. Therefore, the rental income considered by the underwriter will be higher than what you reported to the IRS and your state's fiscal authorities.
Do I Have to Report Dividend and Interest Income?
Generally, a prospective creditor would want to see that dividend and interest income would continue for at least three years before the lender takes it into account when reviewing your mortgage application. In other words, you may have earned, say, $20,000 or $30,000 in dividends and interest in the past two years, but if there's no way to verify that such earnings will continue in the future, the lender will not take that income into account.
To ascertain your interest and/or dividend income, the lender would require that you submit two things:
- Your personal tax returns for the last two or three years, and
- Paperwork that shows your ownership of the underlying assets, such as brokerage or bank statements, along with promissory notes and stock certificates
Is Income from Child Support or Alimony Considered?
A lender generally would not ask you for information on alimony, child support, or separate maintenance income. But you can provide that information if you so wish, especially if you feel that you will rely on that income to repay the mortgage.
Will the Lender Accept Income that has not been Reported to the IRS?
For obvious reasons-one of which pertains to the prevention of money laundering and other economic crimes-a prospective creditor will not accept income that you have not declared to fiscal authorities. Now, if you can prove that the income is legal and not mandated to be reported, the lender may consider it.