Purchasing a home can be one of the most exciting times in one’s life! But before you can begin your house hunt, you have to qualify for a mortgage. To do this, we will take a look at several different qualification areas, including income. But what if much of your income comes from working overtime? Let’s take a look at how to use overtime income in the mortgage process.
How to use overtime income for a mortgage
Can overtime be used as income for a mortgage? In short, yes. However, there may be a few extra hoops to jump through when it comes to using it as income, including:
Establish income history
First, you’ll need to establish a consistent length of time where you are receiving the overtime income. Since overtime is not necessarily a guarantee, and it is not part of your salary or hourly wage, you cannot use a few weeks of overtime as income. You will want to have at least a year or two of consistent overtime work for it to be considered as part of your income qualification.
If you want to use this income to potentially qualify for a higher mortgage amount, then having to establish this history may mean putting off home buying goals for a year or two. You should consider if this is a plausible timeline for you, or if your needs require you to purchase a home sooner than that.
Provide your paystubs
To have your overtime work factored into your income for qualification, you will have to provide paystubs on top of your W-2’s. Your W-2 will show your ending yearly income. Paystubs will show the breakdown of your ending earnings. This will give your loan officer a better, more detailed look at how much overtime income you are earning. Also, if you change jobs you may need to provide this from your new employer.
Along with your W-2 and pay stubs, you may also be required to provide an employment verification letter. Overtime is not a guarantee. As a result, your employer will have to provide verification stating that the overtime should be available throughout your employment. This can be considered “continuous verification.” The verification shows that this income, while not part of your standard pay, will not be going away and should not affect your ability to pay your mortgage.
How do lenders and underwriters calculate
As we’ve mentioned, you’ll have to produce a couple of documents that will provide a better picture of your income. There are a couple of ways we can calculate overtime income for qualification. First, it may be considered at face-value if the history is long and consistent, with no major amount differences in the last couple of years. However, if the income amounts are not consistent throughout the last two years of history, we may take the average of the two years to determine qualification.
For example, to qualify for an FHA loan, your lender must average out your last two years of income for effective income and you need at least two years of overtime income for it to be factored into this qualification criteria. It is very important that you look into each program and understand the eligibility standards before applying.
The bottom line
Using your overtime income can be a great way to be considered for a higher mortgage amount. But you should also be wary of doing so. Before deciding to go this route, you must consider your situation. Evaluate whether your overtime will be sustainable throughout the life of your mortgage. It might be more beneficial to only factor in your standard income.
As always, we’re here to answer any questions you have and help guide you through the process. Give us a call or start your application today.