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Income – What a Lender Looks At to Qualify You (Part 2)

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Income Series

Part 2: Variable Income: AKA, Tips, Commission or Bonus Income

In part one of our income series we discussed base pay and debt-to-income. The point being that lenders differentiate between various types of income and consider some more stable than others. In this part we will discuss the various types of other income, those considered less stable yet necessary to your loan approval.

Income is a major component of the new mortgage regulations implemented on January 10th of this year. The regulation requires lenders to document and analyze all sources of income for stability and continuity, a simple task when only base pay is used. However, your income might consist of overtime, bonus, tips, or commissions. These variable income sources, along with others, are far less stable or likely to continue. So let's explore the conditions around which this income might be acceptable.

Stability and continuity define variable income and as such, underwriters require documentation to prove the income is stable and likely to continue. 

Stable is defined as income that has been received for a two year period. It may be possible to qualify with a lesser history of receipt if you've recently taken on new employment but earned comparable income at your previous employer. 

In nearly every case of variable income underwriters require a full verification of employment (VOE) – a document sent directly to your employer which provides a detailed breakdown of each type of income earned. The underwriter then determines the trend by performing several calculations: 

•    If the income shows an increase over the last two years the underwriter will probably use it although she will choose a monthly, qualifying figure equal to a two year average. 

•    If the income is declining, she will look for an explanation and, if it's reasonable to assume the income will continue, she will use the lowest figure, an amount equal to the most recent years average. 

•    If the income is declining and continuity looks bleak she will most likely disregard the income entirely. 

Underwriters are cautious and will carefully consider variable income before using it. Their approach is sensible because relying on income that might disappear soon shows poor judgment. If an underwriter finds fault with your variable income then review these points and if you are confident offer an explanation and work with your employer and underwriter to document the continuity and stability of your livelihood. 




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