In this article, we will discuss and cover qualifying for mortgage with irregular income on a home purchase. Income qualification by loan officers is one of the most important factors in getting a residential mortgage loan approval. There are strict income and employment guidelines when it comes to qualified income. Cash-income and/or undocumented income cannot be used as income by borrowers. There are federal mortgage lending rules and guidelines when it comes to income qualification for mortgage. Mortgage underwriters have a lot of discretion when it comes to income.

Lender Overlays and Mortgage Underwriter Discretion

The individual lender may have its own lender overlays when it comes to irregular and/or declining income. Lender overlays are guidelines that are above and beyond the minimum agency federal lending guidelines by FHA, VA, USDA, Fannie Mae, Freddie Mac. For example, declining W-2 income can be used under federal lending income qualifications. However, declining income can only be used if the mortgage underwriter believes the income of the borrower is likely to continue for the next three years. However, a particular lender might have its own overlay where declining income cannot be used as income. We will discuss this topic in more detail later on in this blog. Borrowers who are a 1099 wage earner will need two years of tax returns and two years of 1099 in order to qualify for a residential mortgage. All of the deductions will be deducted from gross income. The income used as qualified income will be the adjusted gross income. The average of the past two years adjusted gross income will be used in income qualification for mortgage purposes

Other Types Of Income

All cash income cannot be used to qualify for income. Other income such as bonus income, overtime income, and part-time income that has not been seasoned for two years cannot be used. Other income can only be used if the borrower has a two-year history of making such income. In order for you to be able to use bonus income, overtime income, or part-time income, borrowers must have had a consistent two-year history of receiving those income. The employer needs to state that bonus income, overtime income, or part-time income is likely to continue for the next 3 years. If the bonus income, overtime income, or part-time income is rising year after year, the lender normally averages the past two years of bonus income, overtime income, or part-time income to derive monthly gross income from these sources. If bonus income, overtime income, or part-time income has been decreasing, then the most current year of bonus income, overtime income, or part-time income is used to qualify income for mortgage. It is up to the mortgage underwriter when the other income is irregular, not consistent, and declining.

Underwriter Discretion On Irregular And Declining Income

Mortgage underwriters have a lot of underwriter discretion when it comes to other income. If the most recent YTD bonus income, overtime income, or part-time income is significantly less than the previous year’s bonus income, overtime income, or part-time income reflected on W-2s, then the lender can decide not to give credit for these other income sources. This depends on your mortgage underwriter. The mortgage underwriter can say the other income cannot be used due to be declining. This concept applies to W-2 income in general. If the other income of the borrower is declining and/or irregular, the lender will order a written verification of employment (VOE) and see what the employer says. It is important for the employer to state the borrower’s other income to continue for the next three years is very likely.

Inconsistent W-2 Income For Income Qualification For Mortgage

Most lenders want to see a two-year employment work history from borrowers in the same job and same field with a consistent income history in the past two years. However, many times that is not the case but that does not mean the borrower does not qualify for a mortgage due to irregular income. Borrowers can be a 1099 wage earner and get a new job as a W-2 and qualify for a residential mortgage loan. This holds true only if the borrowers can provide the following: 

• offer letter of employment by the new employer
• 30 days paycheck stubs prior to the issuance of a clear to close
• written verification of employment by the employer
• VOE needs to state new employment is likely to continue for the next three years
• new monthly gross income stated on the offer employment letter will be used for income qualification for mortgage

Per agency mortgage guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac, borrowers do not need to be employed in the same company for the past two years. You can have gaps in employment in the past two years and qualify for a mortgage.

Irregular Income In Past 2 Years

However, what happens if you have had irregular work hours in the past two years due to irregular hours?

• In cases like these, the past two year’s W-2 income will be averaged if the most current year income is greater than the prior year’s W-2 income
• If the most current year is lower than the prior year, the lower year W-2 income will most likely be used and averaged with YTD  W-2 wages
• If YTD W-2 income is significantly lower than prior year W-2 wages and you are showing a decline in income, then the mortgage underwriter will most likely just go off YTD W-2 wages average in calculating income qualification for a mortgage
• Some lenders will have their own lender overlays on declining income and/or irregular income
• Some lenders will not allow borrowers to use any of the income wages from other income if they see consistent declining income

The mortgage underwriter has a lot of discretion on whether or not the lender will allow a second other income that is not consistent, irregular, and declining.

Qualifying For Mortgage With Irregular Income With Prior Part-Time Income To Full Time Income

If you have been a part-time W-2 employee or a probationary employee but just got promoted to a full-time employee or permanent employee with a dramatic increase in income, then your current new income will be used in income qualification for mortgage.

For example, let’s take a case scenario:

• Borrowers have been working in your job for the past two years as a part-time employee
• Making $10.00 per hour
• Recently got promoted to a full-time employee and are now making $15.00 per hour
• The $15.00 per hour will be used for income qualification for a mortgage
• This will be the case as long as the borrower can get a verification of employment from the employer
• Verification of Employment need to state the fact that the borrower is a full-time employee and full-time employment status will continue for the next three years

A 30-day paycheck stub will be required prior to closing on your mortgage loan.

Qualifying For Mortgage With Irregular Income And Gaps In Employment

Qualifying For Mortgage With Irregular Income and gaps in employment is allowed.

Federal income guidelines for income qualification for mortgage only require a two-year employment history.

• Gaps in employment are allowed
• Homebuyers unemployed or had an employment gap for six months or less, than 30 days of paycheck stubs are required from a new job
• Borrowers have been unemployed for 6 or more months, six months of seasoning in a new job is required
• For example, say borrower just got a new job but have been unemployed for the past two years
• If this is the case, then two years of employment history prior to being out of work period is required
• Borrowers need to be on a new job for at least six months in order to qualify for a mortgage 
• On the flip side, if borrowers were unemployed for 5 months and 3 weeks and just got a new job, they will qualify for a mortgage
• They can close on the mortgage as long as the borrower can provide 30 days of paycheck stubs from a new job
• Borrowers employer needs to respond to verification of employment verifying that borrower is employed full time

Indication of employment status is likely to continue for the next three years.

Qualifying For Mortgage With Irregular Income: Recent College Graduates With No History Of Income

Home Buyers who recently have graduated from a technical school or are a college graduate and just got their first job and have no prior employment history can qualify for a mortgage. They can qualify for a mortgage without providing two years prior employment history. The time as a full-time student is equivalent to work history. All borrowers need to provide the mortgage underwriter is school transcripts. Home Buyers who need to qualify for a mortgage with a national lender with no mortgage overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

This BLOG On Qualifying For Mortgage With Irregular Income was updated on March 16th, 2022