How lenders categorize income

Income is nothing more than a broad category of mortgage underwriting process. Each type of income has specific underwriting rules and has a direct impact on the type of loan your borrower can get.

Here’s how lenders categorize income and the products available based on the type:

W-2 Employees:

W-2 employees who receive a regular salary or hourly wage have a stable income source. They typically have an easier time qualifying for various loan products, including conventional loans, FHA loans, and VA loans, as long as they income can proven as valid as it relates to job history, earning consistency and the actual income source.

Self-Employed Individuals:

Self-employed individuals face additional scrutiny from lenders due to the variable nature of their income. Lenders typically require documentation, such as tax returns and financial statements, to assess income stability and determine loan eligibility. These borrowers are evaluated on their bottom line taxable earnings and not the gross earnings as is the case with W-2 wage earners.

Self-employed borrowers may qualify for conventional loans, but they may need to provide additional documentation, including their current year-to-date earnings statements, and meet specific income requirements of the lender. Individual lenders have their own criteria to evaluate these buyers.

Commission-Based or Bonus Income:

Borrowers who receive a significant portion of their income from commissions or bonuses also face additional scrutiny. These borrowers may be independent contractors like real estate agents or regular W-2 employees like sales rep working for a phone service provider. Lenders typically evaluate the 2-year consistency and predictability of this income source.

If the income can be documented and demonstrates a history of stability, these borrowers may apply for the same loan products available to w-2 wage earners, but not necessarily loan products geared specifically to self employed borrowers.

Investment Income:

Borrowers who rely on investment income, such as dividends or rental income, will be required to provide tax returns, rental agreements with documented payments, and third-party account statements to verify the income’s stability and consistency. Only income that is verified from these documents can be used for qualifying.

The specific loan products available to this kind of buyer will depend on the borrower’s overall financial profile.

Non-Employment Income:

Borrowers who receive income from sources other than traditional employment, such as alimony, child support, or retirement benefits, may still be eligible for certain loan products. Lenders typically require proper documentation and evidence of the stability and predictability of this income to assess loan eligibility. Again, third-party verification is the key here. Bank statement records, award letters along with proof of receipt and wire transferred are the most common methods used to evidence this income.

In all cases, lenders evaluate the borrower’s ability to repay the loan based on their income, credit history, and other financial factors. The specific loan products available may depend on the borrower’s overall financial profile and the lender’s guidelines. It’s advisable to work with a mortgage broker who can assess your specific income situation and guide you toward the right loan products most suitable for your circumstances.

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