When you’re dreaming of owning a home, the last thing you want is a hitch in your mortgage application. One common snag? Certain types of income simply don’t qualify. Let’s dive into which income types fall short and why.
Why Some Incomes Don’t Qualify
Lenders want to ensure you can consistently make your mortgage payments. To do this, they evaluate your income’s stability, consistency, and likelihood of continuing. Some income sources just don’t fit the bill.
Inconsistent or Unverifiable Income
Seasonal Employment: While working at a ski resort in winter or a beach bar in summer might be lucrative, it’s not consistent year-round. Lenders prefer steady, predictable income streams, and seasonal employment doesn’t offer that level of consistency. The variability of such jobs makes lenders cautious, as there’s no guarantee of income during off-peak seasons.
Delivering Groceries
Gig Economy Work: Platforms like Uber, Lyft, and Fiverr are great for extra cash, but fluctuating earnings and lack of long-term contracts make it hard for lenders to count on this income. The gig economy’s appeal lies in its flexibility, but for lenders, this flexibility translates into unpredictability, which isn’t ideal for mortgage approvals. To make this work, you would need a consistent amount of income spanning at least two years.
Cash Payments: Unless you can provide thorough documentation, cash payments aren’t easily verifiable, leaving lenders skeptical. Many self-employed individuals or those in informal sectors rely on cash payments, but without proper records, this income source is seen as unreliable and difficult to prove.
Short-Term or Temporary Income
Temporary Jobs: Employment through a temp agency or short-term contract work doesn’t guarantee future income, making it less reliable for long-term financial commitments like a mortgage. Lenders need to see a stable employment history that indicates future earning potential, which temporary positions often lack.
Unemployment Benefits: These are temporary by nature and don’t provide the stability lenders need to see. While unemployment benefits can be a crucial lifeline during job transitions, they don’t offer the long-term security required to reassure lenders of your ability to make consistent mortgage payments.
Hundred Dollar Bills
Declining or Irregular Income
Overtime and Bonus Income: While lucrative, if not consistent or guaranteed, lenders may not consider these earnings. Many people rely on overtime and bonuses to boost their income, but without a guaranteed regularity, these earnings are considered too variable to count on for mortgage qualification purposes.
Self-Employment Income: Without a solid two-year history and extensive documentation, self-employment income can be tricky for lenders to evaluate. Self-employed individuals must provide detailed tax returns and profit-and-loss statements to demonstrate their income stability over time, which can be a hurdle for those with less established businesses.
Non-Employment Income
Child Support and Alimony: Though sometimes considered, these sources must have a well-documented history and future guarantee, which isn’t always easy to prove. Courts can modify child support and alimony agreements, introducing an element of uncertainty that makes lenders hesitant to rely on these payments.
Gambling Winnings: Windfalls from poker or lotteries are far too unpredictable to count on for a mortgage. While a big win might boost your bank balance temporarily, the irregular nature of gambling income doesn’t provide the steady, reliable stream that lenders need to see.
Why It Matters
Lenders are cautious for good reason. The 2008 financial crisis taught them to scrutinize income more carefully to avoid future defaults. They need assurance that you’ll reliably make your mortgage payments over the long haul. Consistent, verifiable income is a big part of that assurance.
A Man Preparing His Financial Records
Preparing for Your Home Loan Application
To boost your chances of approval, focus on maintaining stable employment. If you’re considering a job change, it might be wise to hold off until after your mortgage is secured. Lenders favor applicants with a consistent work history, so remaining in your current role can provide the stability they seek.
Documentation is key. Keep meticulous records of all income sources. Pay stubs, tax returns, and bank statements are your friends here. Having comprehensive documentation readily available can significantly streamline the approval process and bolster your application.
Debt management is another critical factor. Lowering your existing debt can make you a more attractive candidate by improving your debt-to-income ratio. Lenders want to see that you can manage your financial obligations responsibly, and a lower debt load reflects positively on your financial health.
Lastly, your credit score plays a pivotal role in your mortgage application. A good credit score can sometimes compensate for less traditional income sources, showing lenders you’re reliable. Ensuring your credit report is accurate and addressing any issues promptly can enhance your chances of approval.
Final Thoughts
Knowing which types of income won’t qualify for a home loan helps you prepare better. Steady, verifiable income is key to a successful mortgage application. By understanding and navigating these income challenges, you can position yourself more favorably in the eyes of lenders. So, while gig economy earnings and seasonal jobs are fantastic for extra cash, they’re not the golden ticket for a home loan. Focus on stability and documentation, and you’ll be well on your way to securing that dream home.
Of course, while we are real estate professionals, we aren’t mortgage experts. So the best way to get an idea of what you need to do to qualify for a home loan is to talk to a mortgage professional. If you’d like the contact information for a local expert we’ve had good experiences with, please don’t hesitate to reach out to us.
