Qualifying income is a critical concept lenders use to evaluate whether you can afford a mortgage or other loan. It represents the reliable portion of your income that a lender expects you to continue earning, based on evidence such as W-2s, pay stubs, and tax returns.

How Lenders Determine Qualifying Income

Lenders aim to comply with the Ability-to-Repay rule mandated by the Consumer Financial Protection Bureau, focusing on income that is stable, reliable, and recurring. For salaried employees, this process is straightforward—verified by recent pay stubs and W-2 forms. However, borrowers with variable income like freelancers or commissioned salespersons often must provide at least two years of tax returns to demonstrate consistent earnings.

Common Types of Income Considered

  • Salary/W-2 Wages: Viewed as most stable; easily verified.
  • Overtime and Bonuses: Counted if consistently earned over the past two years.
  • Commission: Requires a two-year history for averaging.
  • Self-Employment Income: Net income after business expenses, verified via personal and business tax returns spanning at least two years. See our article on Self-Employment Income for details.
  • Rental Income: Typically, lenders count 75% of gross rental income to account for vacancies and expenses, supported by lease agreements and tax returns. Learn more in Rental Income.
  • Child Support and Alimony: Counted if court-ordered and consistently received, with anticipated continuation for at least three years.
  • Social Security and Pension: Very stable; requires official award letters.
  • Investment Income: Included if stable over time, documented by investment statements.

Why Your Qualifying Income Might Be Less Than Your Actual Income

Several factors can reduce qualifying income:

  • New side businesses without two years of history.
  • Unreimbursed work expenses that reduce net income.
  • Cash-income not reported on tax returns.
  • Irregular or one-time bonus payments.

Impact on Debt-to-Income (DTI) Ratio

Your qualifying income is key in calculating your DTI ratio, which compares your monthly debt payments to your gross monthly qualifying income. Most lenders prefer a DTI below 43% for mortgage approval. A higher qualifying income lowers your DTI, making you more attractive to lenders. Read more about Debt-to-Income Ratio.

FAQs

Can my spouse’s income count? Only if they co-sign the loan.

Will a new job hurt my qualifying income? Lenders consider job stability; a new job in the same field with a steady salary is generally acceptable.

Can non-taxable income be adjusted? Yes, lenders may “gross up” non-taxable income like Social Security by 15-25% to factor into qualifying income.

Authoritative Sources