In this blog, I’d like to elaborate on the in-and-outs of income and why you might be overlooking
certain aspects of your money.
Types of Income:
Let’s discuss the different types of income, and how they relate to the process of qualifying for a
home loan.
W2 Employee Income
When it comes to income used to qualify for financing, the path of least resistance toward getting
a home loan is W2 employee income. This is a job where you work for an employer who takes
taxes and deductions out of your check before you get it, and you are probably paid every two
weeks or twice monthly. Underwriters like the predictability of the income and that the buyer
already paid taxes. If you don’t have W2 income you should strongly consider changing jobs to
get W2 income in your pursuit to buy a home. It makes the process a whole lot simpler.
Extra Income (i.e., Part-Time Jobs)
Some people will get a part-time or second job to help boost their income prior to beginning their
home search. But you should know that unless you have held this second job for at least one
year, it will not count toward your annual income. It is perfectly fine to take on extra work if you
want that money to bolster your savings or to cover extra expenses, but if you are simply taking
it so your mortgage lender sees a higher annual income, get that job at least a year ahead of time
and work steadily.
Self-Employment
But let’s say you don’t want to get a W2 job and work as an employee for a while to make your
home buying mission a reality. You are self-employed and like what you are doing now. Perhaps
you get paid cash, or you do some sort of freelance or gig work where your tax information
comes through a Form 1099.
You can still qualify if you are self-employed, but it is trickier, and you may have to take on
added income tax liability to qualify.
When you get paid in a way where taxes aren’t taken out, it becomes very important that you are
doing your taxes appropriately for the purposes of qualifying for a loan. For self-employed
income, you must have a two-year history of filing taxes. The adjusted gross income is added
together for both years and divided by 24. This is how your monthly income is calculated. Also
remember that is your adjusted gross income, meaning after tax deductions. In other words, tax
planning is very important if you are self-employed. If you aren’t showing any profit on your
taxes you won’t qualify for a loan, but if you do show a profit, you will have a tax bill if you
haven’t been taking care of your taxes yearly.
Many times, someone who is self-employed may write off a lot of expenses to offset the tax
liability. While that is a great strategy for reducing tax liability, it is not beneficial to qualifying
for a loan because it lowers your adjusted gross income which gives you less monthly income to
be used to qualify.
Disability/social security/retirement/fixed income.
Qualifying for a mortgage with this type of income is actually very good for obtaining a loan. A fixed income, including steady sources of money such as settlements, alimony, or social security, can certainly qualify you for a
loan. Check with your lender but depending on the program you receive this income is rounded
up to 115% and is considered reliable and likely to continue. Make sure you have your
awards/benefits/summary paperwork explaining the program: what you get, when you get it, and
how long you will get it. The underwriter will want to see that.
I hope this has been a helpful look at different kinds of income, and how they figure into the
process of qualifying for home ownership. For more tips from the guy who’s been on every side
of the real estate game, join me for my next blog!