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Mortgage Pre-Approval: How To Provide Proof Of Income

Mortgage Pre Approval How To Provide Proof Of Income

When you first speak with a mortgage lender about buying a home, you may hear about providing proof of income and other financial information. Providing these items will allow the mortgage lender to give you an informed expectation for your buying range. Or, if you are looking for a pre-approval, providing these items will allow the lender to get your approval processed.

Because it can be confusing to collect and maintain the information that you’ll need to bring to a mortgage lender, it’s important to understand what your financial assets are. In this article, we’ll help you to figure out what you need to share for proof of income and what other financial assets could factor into your home purchase.

When is the right time to contact a mortgage lender?

Providing proof of income

What income can be used to qualify for a mortgage? Lenders will typically count income that you currently have or can expect, but the weight given to individual types of income may vary based on qualifying factors such as consistency (how regularly the income is received), longevity (how long the particular income has been earned), and continuity (the likelihood that the income will continue into the foreseeable future).

Employment income: salary or wages from an employer

When you first speak with a mortgage lender about buying a home, you may hear about providing proof of income and other financial information. Providing these items will allow the mortgage lender to give you an informed expectation for your buying range. Or, if you are looking for a pre-approval, providing these items will allow the lender to get your approval processed.

• Preferably demonstrable for at least two years.

• Indicated by W2s, pay stubs, and/or verification by the employer.

• Salary is taken at face value, whereas hourly wages may be averaged over the previous two years. 

• Overtime and bonuses are averaged over the previous two years.

Self-employment income: working for yourself or a company you own

• Most lenders will require that you show consistent income from self-employment for at least two years before it can be counted.

• Income will be averaged over the previous two years (meaning they won’t just accept your current earnings or salary).

• Income must show stable or increased earnings; diminished earnings are likely to be considered high risk.

• Self-employed applicants must also provide a history of filed tax returns. 

Rental income: earnings from a rented property

• Earnings will be averaged over the previous two years and must be demonstrable for that length of time.

• Lenders will assess the cost of maintaining the property, including potential depreciation, and deduct that from your net earnings when applying them to income.

• Investment income: earnings from investment portfolios, i.e. stocks

• Certain stocks pay dividends to shareholders, which can count as income. These payments are usually made quarterly, and reflect the health of the company and the value of the stock.

• A two or three-year track record of earnings is required.

• Applicants must demonstrate an asset base sufficient to support claimed investments.

• Applicants must provide a history of tax returns for two or three years.

Retirement income: social security, pensions, etc.

• Award documentation is sufficient for social security and pensions.

• 401k and IRAs require tax documentation to show an asset base large enough for at least a 3-year continuance. 

Military income

The same documentation rules apply for active military and their families. One benefit for our service members is that housing, base, and food allowances can be included as income for mortgage calculations. Those deployed to war zones must provide documented confirmation since income earned in these zones is not taxed. 

Learn about how you could apply for a VA Loan. 

Secondary income: side hustles

For part-time jobs, income must be demonstrable for two years and will be averaged over that period. Substantiated by W2s and pay stubs.

For side businesses, similar qualifications to self-employment income are used. If an applicant cannot demonstrate income from a side business for the past two years, this income may be used by a lender to “shore up” the application. This is called a compensating factor, and may be used to counterbalance low credit scores, high debt ratios, or a low down payment. However, it will not be counted as income.

What about savings accounts?

A savings account may be used for a down payment, which will be an important factor in your pre-approval and loan estimate. However, savings may not count as income because they are accumulated over time and cannot be guaranteed to grow at a specific rate.

Mortgage lenders look at savings accounts as a type of safety net for borrowers. If you should lose your job or temporarily suffer a dip in your monthly income, you can use savings to cover your mortgage payments. Because of this, lenders look at borrowers with sizable savings accounts as less risky.

Other savings, like an inheritance or trust fund, may have a time sensitive disbursement plan, either monthly, yearly, or at other specific times. Even if you receive this money on a regular basis, it is most similar to a savings account, and your mortgage lender will need to understand your access to this asset.

Stock and investment earnings

Certain stocks may contribute to your income in the form of dividends. However, many companies do not pay dividends for stocks, and their value is based on their sale. You may be inclined to sell a stock in order to purchase a home, but you cannot use stocks as a financial asset.

Many people do plan to sell stocks in order to purchase equity, and if you are speaking to your mortgage lender about your home buying potential, it is helpful to know the total value of your holdings.

Equity and investment properties

Any equity that you own has value. However, whether you want to liquidate that value in order to purchase your new home will make a difference with your mortgage.

If you own a home and are selling it to purchase a new home, an appraisal will be an important part of your process. Getting an appraisal will allow a mortgage lender to understand what your home’s value is, and that can help to create a pre-approval amount for you to purchase a new home. When this is done, it is assumed that you will be selling your old home at a similar value to the appraisal cost in order to pay for your new mortgage. This could factor into the cost of the home, your down payment, or be applied to monthly premiums. But once you have a selling contract on your current home, there is no need for an appraisal.

If you are buying a second home or investment property, you may use the equity of your first home as collateral if you have paid off around 75% of your previous mortgage.

Sharing your income information

If you are applying for a mortgage loan, be open and honest about all of your income sources with your mortgage lender. Your lender will let you know about the qualifications of your income and help you through the process of providing proof of income.

Even if your income is not applicable, it may be helpful in determining what type of borrower you will be. A secondary source of income that could contribute to your savings is a positive indicator. And, if it is not able to qualify as income, it may be available to you if you refinance.

What to expect from a lender

A lender will look at your income to determine how large of a PITI—a monthly payment of principal, interest, taxes, and insurance on the home—that you can pay without creating a financial hardship. Most lenders look for a PITI no larger than 28% of your gross income, though this is variable. In addition, a lender may look at other claims to your income, such as credit card payments, and consider them when determining the amount you will be able to handle.

Are you looking to speak with a mortgage lender about your finances? Contact RatePro Mortgage to get more information about your options with a mortgage loan.

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