Using overtime income to qualify for mortgage loans is allowed under certain circumstances. Overtime Income and other income are allowed as qualified income for mortgage borrowers. However, overtime income and/or other income are only allowed if the borrower has a two-year history of making such income. Also, the likelihood of continuation for the next three years has to be likely in the borrower earning overtime income and other income. Base income is always used.
Using Overtime Income and Other Types of Irregular Non-Traditional Income To Qualify for Mortgage
Overtime income, part-time income, and bonus income can be used. Mortgage underwriters want to see overtime income and other income stable and are likely to continue for the next three years. In this blog, we will discuss overtime income and other income as qualified income when qualifying for home loans.
Using Overtime Income To Count Towards Qualified Verified Income
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Lenders want to make sure that borrowers have the ability to repay their new proposed mortgage housing payments. Lenders want to feel confident that borrowers have the sufficient qualified income to be able to repay their new housing payments timely without stress. Only qualified income counts as income in qualifying for home loans. Cash income is not considered qualified income.
What Types Of Income Can Be Used As Qualified Income For A Mortgage
Borrowers can use the following types of income as additional qualified income:
- Overtime Income
- Part-time income
- Bonus Income
- Commission Income
- Royalty Income
- Other qualified income reporting on income tax returns
In order to use other income as qualifying income, the other income needs to be seasoned for at least 24 months. Mortgage underwriters want to feel confident that other income will continue for the next three years. To confirm qualified income, lenders will request verification of employment by employers.
How Do Mortgage Lenders Verify Employment
Verification of employment is when a mortgage processor will take care of it on behalf the mortgage company. Loan officers should never issue pre-approvals on borrowers with other types of income unless they have verification of employment. Employment verification is a form used by lenders. VOE forms need to be completed by employers.
It breaks down the borrower’s income summary for the past two years. It also asks the question of whether the overtime, part-time, and bonus income will continue for the next three years. There is no guarantee but the form asks whether it will be likely to continue. If the employer checks NO, then the other income cannot be used.
Using Overtime Income That Is Declining And Irregular Income
Mortgage underwriters have the discretion on whether or not other income can be used as qualified income. If borrowers have declining income from one year to the next, then the other income cannot be used as qualified income. For example, if a borrower has overtime income of $10,000 in 2017 and $5,000 in 2018, this is drastic in declining income. It is up to the mortgage underwriter. Underwriters have full discretion on whether or not to allow declining income.
If the declining income was due to the borrower being off from work due to maternity leave or sick leave, then it is up to the mortgage underwriter whether or not to accept it. Just because one underwriter says no does not mean another underwriter will say yes. Irregular overtime income can be an issue. If a worker has overtime income for several weeks and then the overtime stops and recontinues months later, this is considered irregular overtime income. Lenders want to see consistency in overtime and/or other income. Declining and irregular income is not viewed favorably by lenders.
Exemption To The 2-Year Seasoning Rule
Gustan Cho Associates will allow overtime and/or other income to be used as qualified income if the borrower has other income for at least 18 months. This is on a case-by-case scenario basis only for borrowers with strong credit and lower debt to income. This is also based on mortgage underwriter discretion.
For example, if a borrower had overtime income of $1,000 per month for at least 18 months, we will allow the following:
- Take the average of the 18 months’ income
- Divide that income by 24 months
- The yielding income will be used as qualified income
This may or may not be used depending on underwriting discretion. If the underwriter believes that the overtime and/or other income is solid, the 2-year exemption on other income can come into play.
For more information on this topic, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org. We are mortgage brokers licensed in 48 states with no overlays on government and conventional loans. We are also experts on non-QM, bank statement mortgages, and alternative financing loan programs. Gustan Cho Associates has a network of over 190 wholesale mortgage lending partners with access to thousands of mortgage loan products. The team at Gustan Cho Associates are experts in originating government and conventional loans with no lender overlays a hundreds of non-QM and alternative non-prime mortgage loan programs.
This blog on Using Overtime Income was updated on October 8th, 2022
October 8, 2022 - 4 min read