How Lenders Calculate Your Income for a Mortgage

Lenders do not simply look at your salary. They calculate qualifying income using specific rules that vary by income type, employment status, and loan program. Understanding what counts helps you prepare.

W-2 Employee Income

• •Base salary — fully counted, verified with pay stubs and W-2s
• •Bonus and commission — counted if received for 2+ years; averaged over 2 years
• •Overtime — counted if consistent for 2+ years
• •Rental income — counted at 75% of gross rent (25% vacancy/maintenance allowance)

Self-Employed Income

• •Net income — the profit shown on your tax returns after business expenses
• •Averaged over 2 years; if declining, the lower year is used
• •Lenders review Schedule C, K-1s, and business tax returns

What Lenders Do Not Count

• •Income from a job you just started (unless in same field)
• •One-time windfalls (inheritance, settlement)
• •Unverifiable cash income
• •Income from a business you have owned less than 2 years
• •Reimbursements and expense allowances

Income Lenders Can Count (With Conditions)

• •Alimony/child support — if received for 12+ months and documented
• •Social Security — counted grossed up by 25% (tax advantage)
• •Retirement/pension — if expected to continue 3+ years
• •Investment income — if consistent and documented
• •Part-time/second job — if 2+ years of history

Documents Needed

• •W-2 employees: 2 years of W-2s, 30 days of pay stubs
• •Self-employed: 2 years of personal and business tax returns, YTD P&L
• •Retired: Award letters, 1099s, Social Security letter
• •Rental income: Leases, tax returns showing rental income

Key Takeaways

• •Lenders use gross income, not take-home pay
• •Bonus, commission, and overtime need 2-year history
• •Self-employed income is based on net profit, not gross revenue
• •Some income (alimony, Social Security) can be counted with documentation
• •Gather documents before applying to speed up the process