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Solution 2: Document Additional Income

TABLE 3.2 Down Payment to Ratio Comparison

Down Payment to Ratio Comparison

FIGURE 3.2 Annual Income Required to Qualify for a $200,000 Mortgage at 7 Percent Interest for Different Mortgage Programs

Annual Income Required to Qualify for a $200,000 Mortgage at 7 Percent Interest for Different Mortgage Programs

Self-employment income. Lenders generally do not accept self-employment income unless it has been stable and continuous for at least two years. This means that you have at least two years of tax returns to document the income. Exception: If you can demonstrate that you were successful in a similar business or activity prior to becoming self-employed (e.g., you were a salesperson and started your own marketing firm), the lender may consider a shorter term of self-employment. Even then, the lender probably will use an average of the two years' income unless the income for the most recent year is less than the previous year. In that case, the lender probably will use the lower of the two figures. If so, provide three or more years' tax returns (and an up-to-date profit-and-loss statement) to document that your self-employment income is cyclical and is not in permanent decline. If you can successfully argue this, the lender may be persuaded to use an average of your self-employment income over three or more years. If you are marginally qualified on the average of your self-employed income, you may persuade the lender to use your most recent year's income if you can demonstrate a consistent and significant upward trend (i.e., three years or more of increased earnings of at least f 5 percent per year). Perhaps you can make another argument to support your case; for example, you just obtained a multiyear noncancelable contract and can document it from a large and stable customer over and above your ongoing business.

Commission income. Generally, commission income is treated in about the same way as self-employment income. Provide documentation that your income is stable or increasing via your tax returns. If you are marginally qualified on the average of your commission income, you may persuade the lender to use your most recent year's income if you can demonstrate a consistent and significant upward trend (i.e., three years or more of increased earnings of at least 15 percent per year). In addition, if you have a contract(s) in the present year that will significantly increase your income, you may receive favorable treatment. For example, Bob, a life insurance salesperson, generates commission in two ways: from sales of new policies during the current year and from residuals, or renewals of policies sold in previous years. If Bob continues to sell the same volume of policies each year, his income will continue to increase by the amount of the renewals of existing policies each year. In this case, a salesperson with a proven track record might qualify for a loan based on his most recent year's earnings rather than on an average of two or more years, because of the probability of continued increasing income.

Overtime income. Income from overtime may be considered if you can document a full two-year history of consistent earnings for overtime income. Even if you cannot document two full years, it can be a strong compensating factor if you can demonstrate a year or more. You might persuade the lender to consider the overtime income if this income resulted from a year or more of overtime work and you can document that you will be required to continue working overtime in the foreseeable future.

Part-time income. This type of income may be considered if you can document a full two-year history of consistent earnings for part-time income. Even if you cannot document two full years, it can be a strong compensating factor if you can demonstrate a year or more.

Seasonal income. This income may be considered if you can document a full two-year history of consistent earnings. Even if you cannot document two full years, it can be a strong compensating factor if you can demonstrate a year or more. If the income is from a regular source, such as a department store during the holiday season, or doing landscape work during the spring and summer, it is helpful to provide a letter from the employer indicating that you will be rehired for the next season.

Household members' income. Income earned by other members of the household is not considered unless that individual is a party to the mortgage note. However, you may be able to use the income of that person, such as an adult child living at home, as a compensating factor.

Tax-free income. This income can be “grossed up” to account for the tax-free status of that income. If you receive significant income from nontaxable municipal bonds, VA benefits (other than education), child-support payments, certain types of retirement and disability income, or even food stamps, the earnings from these types of income can be increased by an amount equivalent to taxable earnings.

Child-support or alimony payments. These payments may be considered stable monthly income if there is a history of receiving these payments on a timely basis (and you can document it) and there is a likelihood that such payments will continue for at least three more years. If these payments are scheduled to end in less than three years but will last for a year or more, then this should be counted as a compensating factor.

 
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