You may feel like your lender’s asking a lot of you during your mortgage application process, but once you break it down, proving your income isn’t too complicated.
Proving income is easiest for salaried workers. Your salary will be what lenders look at to make sure you have enough money to afford a home. Non-salary sources of income can be used as well. You can provide proof of income from a second job or side business, social security benefits, pension payouts, child support, and more.
Important: Lenders need to see that these secondary sources are consistent and that you’ve reported them on your tax return. For seasonal work, lenders want to see the income annualized (evened out into equal monthly sums).
Lenders will generally make a call to your employer to make sure that:
If you’re self-employed, your CPA may need to supply a letter confirming your business and income.
Lenders also want to see some consistent history of your earnings. That could mean two years of consistent W-2 statements and tax returns for the same position, but it doesn’t have to. You could also show a positive career trajectory that’s resulted in a steady current income that meets the lender’s requirements. On the other hand, a declining or volatile income history looks risky to lenders.
Not all money you make can be counted as income on a mortgage application. Lenders focus on taxable income, which may be an issue for both salaried workers who claim expenses, as well as self-employed business owners.
For example, if you’re an executive, you might have expensed unreimbursed travel, mileage, parking, or other business expenses on IRS Form 2106. This earns you a tax deduction, but reduces the income that can be included on your mortgage app by the same amount.
A self-employed web developer would be in the same boat. Saving thousands on taxes by writing off equipment, memberships, services, and office expenses would reduce what income can be considered for your mortgage.