How Lenders Look at Your Income: 4 Things That Determine Your Mortgage Approval

RYAN: Let's talk about income. Because when it comes to buying a home, it's not just how much you make, but how you make it, how it's documented, and how consistent it is that really matters. I'm going to walk you through the four key things lenders look at when it comes to your income, so you can understand where you stand and what to expect when applying for a mortgage. Number one: What lenders look for. First up is stability and consistency. Most lenders want to see an average of 2 years of income history in the same field of work. Now, that doesn't mean you have to have the same job for two years, but there should be a consistent pattern. If you've changed jobs, but stayed in the same industry, that's typically going to be fine. If you've been going to school and now just graduated and got that first job, that's also typically going to be fine, especially where we can document that school history. Lenders are also looking for verifiable income. That means income that they can actually see on a W-2, a pay stub, tax returns, or official bank statements. If you're full-time and salaried, this is pretty straightforward. Hourly workers may need to show average hours worked over time, and part-time or variable income workers will often need to be documented over a longer period of time. Number two: Understanding debt-to-income ratios. DTI, or debt-to-income ratio, is one of the biggest factors in qualifying for a loan. Your DTI is the percentage of your monthly income that goes towards monthly debt payments. That includes car loans, student loans, credit card minimum payments, personal loans, and then obviously this new projected monthly mortgage payment. Here's how you calculate it: if you make $6,000 per month before taxes, and your total monthly debts, including this new mortgage payment, will be $2,400, your DTI is 40% — which is essentially $2,400 divided by $6,000. Most loan programs want your total DTI to be under 43 to 50%, which depends on the loan type. A lower DTI often means you qualify for a better loan or a larger purchase amount. But don't worry if yours is a little bit too high — we can often help you figure out ways to reduce it or adjust what you're looking for. Number three: Qualifying income versus non-qualifying income. Not all income can be used for a mortgage, even if it's real money in your account. Qualifying income includes full-time W-2 income, consistent hourly wages, verified part-time income, bonuses or commissions that are consistent over time, alimony or child support, social security, disability, or retirement income. Non-qualifying income usually includes cash jobs with no paper trail, recently started side gigs, one-time bonuses or inconsistent income, Venmo, PayPal deposits that are not claimed on your taxes. Even if you make a lot, if it's not documented, lenders won't count it — at least not for qualifying purposes. This is where we can help. If you're not sure whether something counts, reach out to us. We can review it and figure out what you can use now and what needs more time. Number four: What self-employed borrowers need to know. If you're self-employed, things work a little differently. Lenders usually look at the last 2 years of tax returns. And here's the key — they base your income on your net income, not on the gross. So if you've made $100,000 but wrote off $50,000, your qualifying income might only be $50,000. Consistency is also key. If your income dropped from one year to the next, they may average it or they may use the lower of the two. On the flip side, if your income is trending upwards and you've been self-employed for more than 2 years, that can help. Some lenders do allow for just one year of returns if your credit and reserves are strong. And if you're structured as an S-corp or LLC, we may also need your K-1s, your business tax returns, or documentation of ownership. So here's the bottom line. Income doesn't need to be perfect, but it does need to be documented and consistent. If you're unsure how your income fits into all this, you can download one of our free guides or, of course, reach out in the chat and we'll walk you through it together. We're here to help you move forward.