What is “Stability of Income” When Applying for a Mortgage
Income stability is key detail underwriters consider when reviewing home loan applications. If you’re employed, meet the minimum credit requirements and earn enough income, you might assume you’re an ideal candidate for a home loan. But oftentimes it takes more than having a job to complete one of the biggest purchases of your life. You must also provide evidence of dependable, continuous income before you’re approved for financing.
If you are ready to apply for a home loan, here is what a mortgage lender looks for when determining whether your income qualifies as being stable.
Source of Income
Stability of income goes hand-in-hand with employment. But qualifying for a home loan entails more than being employed and receiving a paycheck. The reliability of income also plays a vital role. Since a mortgage is a 15-, 20- or 30-year commitment, your lender must authenticate the source of your income, and then measure your ability to maintain this income long-term.
Luckily, income information submitted to a lender for qualifying purposes isn’t limited to income received from a job. Other acceptable income sources include funds you receive from retirement distributions, permanent disability, child support, and alimony, etc. Some lenders also allow income from a second job when qualifying mortgage applications. Before you can include secondary income or income from sources other than employment, you must also show convincing evidence that this income will continue into the foreseeable future.
For example, if you want to include child support or alimony payments you receive when qualifying for a mortgage, these payments must continue for at least three years from the date of your application, and you must provide documented proof of the support agreement. Similarly, before you can include income from a second job, some lenders will request documentation to verify a one- to two-year history of working multiple jobs. This can include tax returns or paycheck stubs.
Ideally, you shouldn’t have employment gaps two years prior to applying for a home loan. This is because mortgage lenders prefer applicants who’ve been employed for at least 24 consecutive months. Of course, life doesn’t always go according to plan. And sometimes, we find ourselves unexpectedly unemployed. A gap in employment won’t trigger a definite mortgage rejection, but you’ll have to explain the circumstances surrounding this gap.
Your lender will ask for details about your hiatus. Did you get laid off from your job? Did you take extended maternity leave? Did you quit your job to complete a degree? Did you suffer an illness or injury? Did you care for a sick relative?
Since there are no hard or fast rules regarding employment gaps when qualifying for a home loan, only your lender can decide whether you fit the criteria for a mortgage approval after listening to your explanation.
Two consecutive years of employment also applies if you’re a self-employed borrower. It can be challenging to qualify for a mortgage as a self-employed borrower, but it’s not impossible. You must provide two years of business tax returns. In many instances, lenders use the average of your income (after business expenses) over the past two years to determine your qualifying amount.
Then again, maybe you don’t have employment gaps, but you’ve demonstrated a pattern of bouncing from one job to another. When determining the stability of income, lenders also account for the length of time you remain with employers. Changing employers every year or every couple of years won’t necessarily stop you from getting a mortgage. However, for your income to qualify as stable, the job change must take place within the same field, and with each transition, your income must remain the same or increase.