By Doug Goelz, Mortgage Services
Mortgage lending has a lot of very specific rules about calculating qualifying income for borrowers. Despite your cash flow and the income on which you pay taxes, lenders’ rules can be very conservative, and can discount, or even ignore, your recent income. Here are some general guidelines that can trip up potential borrowers when they go to apply for a mortgage:
For self-employed borrowers, lenders require income tax returns for two years showing self-employed income. This presents a problem for would-be borrowers who recently went from a salaried position to self-employed, even if they are doing exactly the same work, but on a contract basis. Note: Lenders count your salary as soon as you have received a paycheck. So, if you were self-employed for 10 years, but just went back to a salaried position, the lender will give you credit for your current salary once you have received at least one paycheck.
Lenders require a history of 2 years of bonus payments from your current employer before they will count your bonuses as part of your income. If you switch jobs just before you apply for a mortgage, you will not be able to count any bonuses in your qualifying income.
Lenders generally do not count options and RSUs granted as qualifying income.
If you have lots of assets, but very little income, there are programs that will assume you can get some income by depleting your assets. However, retirement assets such as your 401(k) or IRA cannot be used for these “asset depletion” programs unless you are of retirement age.
If you claim unreimbursed business expenses on your tax returns, and you earn more than 25% of your income from commissions, the unreimbursed expenses will be subtracted from your income to calculate your qualifying income for a loan.
Even if you get a W2, if you own 25% or more of the company for which you work, lenders treat you as a self-employed borrower. Your share of the net income (or loss) of the business is added to your W2 income to calculate your qualifying income.
For self-employed borrowers, revenue does not equal income. Lenders look at net income (revenue less expenses) as reported on your income taxes.
Because of all the rules, your loan officer should be very knowledgeable and ask you lots of questions and require some documentation before writing a pre-approval letter.
Want to discuss your prospects for getting a mortgage? Feel free to get in touch with me at 415-730-4665 or [email protected] to discuss your situation.
