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How to Document Income for a Mortgage

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If you're getting ready to apply for a mortgage, it's good to know ahead of time what type of income documentation you'll need. That way, you can be prepared, and the loan process will go smoother. Depending on your income sources, you may only need to come up with a few documents. On the other hand, if you're self-employed, you'll need to supply more. Read on to see what to have ready when you apply for a home loan.

Documentation Rules When Applying for a Mortgage

When applying for a home loan, you'll need to provide proof of income. That way, your income sources, and amounts can be verified.

  • The basic rule is to have written documentation. If you receive cash payments ­— that's hard to prove the source unless you report that cash on your taxes. But when you receive consistent deposits into your checking account, that's easy to establish and show the source.
  • Keep in mind, if you don't count the income on your taxes, you can't use it. For example, you can't count cash tips if you don't claim them on your taxes. The same goes for getting paid under the table. If you hide the income, so you don't pay taxes, you can't count that income on your mortgage application.

Those are the basic rules going in. Now here are more specifics about different types of income.

Different Types of Income Documentation

Here's a quick list of what you may need to gather depending on what type of income you receive. Make sure you have clean copies and include all pages. For example, if you have a four-page bank statement and the last page is blank — you'll still need to include that page. Otherwise, if it's missing, the underwriter will ask for it.

  • Tax returns (business and personal for two years)
  • Pay stubs (for the last 30 days)
  • W2s (most recent)
  • Bank statements (for last two to three months, not transaction printouts)
  • Retirement and investment account statements (for the last two to three months)
  • Award letters for social security and proof of deposit
  • Award letters for retirement and pension as well as proof of deposit

For employment history, you'll need to document two years of history of the same line of work. For example, if you were a software engineer for one year and changed your career, and became the CFO for an online startup company for one year, you wouldn't have two years of employment in the same line of work. So, you'd have to wait for a year to apply if you want to get a government or conventional loan.

Paystubs & W2s

The employer information (name and address) on your paystubs and W2s must be consistent throughout your documentation, or you'll need to write an explanation letter. For example, if you work for ABC Company, but the payroll company is Paylocity, and midway through the year, the payroll company changes — if it shows on your paystub — the underwriter will need an explanation. The employer's address will also be confirmed and needs to be consistent or explained if there's a difference. 

Some professions receive varying incomes. These include waitresses, firefighters and bartenders, nurses, doctors, and pilots. If your income varies, your loan officer or processor will help with the correct calculation.

It's important not to assume that the underwriter will "figure it out" — it's their job to have written documentation backing up their decisions.

Self-Employment

If you're self-employed, you'll need to supply your business and personal taxes. You'll also have to sign a 4506-C so the lender can get a transcript of your taxes from the IRS and verify the information on your tax return.

You'll also need a profit and loss (P&L). A P&L is easy to put together if you don't have a program like QuickBooks. It can be as simple as the current date, the period covered, and the name of the business.

  • Income
  • Expenses
  • Profit

It will need to be signed by the owners.

According to Fannie Mae guidelines, there are certain items from the tax returns added back when computing the income. Your loan officer or processor will do this for you.

The below adjustments must be made to Schedule C income/loss:

  • Non-recurring income must be deducted.
  • Any exclusion for meals and entertainment expenses must be deducted.
  • Depreciation must be added back.
  • Depletion must be added back.
  • Business use of a home must be added back.
  • Amortization must be added back.
  • Non-recurring casualty losses must be added back.

Child Support & Alimony

Have a copy of the court order and bank statements or canceled checks. The main concern with this type of income (just like with any other sources) is consistency. For example, if you get child support or alimony direct deposited into your bank account like clockwork — no problem.

But if some months you don't receive anything, other months are paid in cash, and sometimes the amount is different — you wouldn't be able to count that income.

Social Security & Retirement

For social security, you'll need your most recent social security award letter and copies of the bank statements where the funds are deposited. The same thing goes for retirement and pension income. You'll need your most recent award letter and proof of deposits.

Boarder and Roommate Income

To count income for renting out a room or having a roommate, it needs to be listed on your tax return. Here's the documentation Fannie Mae requires:

  • Documentation of the boarder's history of shared residency (such as a copy of a driver's license, bills, bank statements, or W-2 forms) shows the boarder's address as the same as the borrower's address.
  • Documentation of the boarder's rental payments for the most recent 12 months.

As you can see, the underwriter will leave no stone unturned.

More to Know About Income Documentation

  • Current: Most lenders require the documentation not to be older than four months. So, if you're buying a home and supply the information before you start shopping, and it takes you five months to find a house — you'll need to update your information.
  • Consistency: The stable and reliable flow of income is a critical consideration in mortgage loan underwriting. All income used in qualifying a borrower must be verifiable, stable, and likely to be received for the foreseeable future.

Be Flexible and Willing to Supply Whatever is Needed

The above are the most common sources of income. Of course, there can be additional sources, and the most important thing to know is that you'll have to show proof. Work with your loan officer and processor and be willing to provide whatever they ask for.

It's always smart to save copies of your documents on your computer so you can find them easily and keep hard copies close at hand. That way, if your lender needs you to resubmit something, you know right where it is. And if you're buying a new house — don't pack these documents away! Nobody wants to be digging through boxes at the last minute. When applying for a purchase mortgage or refinance, it's good to be prepared, flexible, and willing to supply whatever the lender asks for.

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