Verifiable income is money earned that comes with documentation to demonstrate that your income is reliable, steady, and will continue. On the other hand, bonus income is money you receive on top of your fixed income or verifiable income.
This bonus income may be included when calculating your debt-to-income ratio. Additionally, this amount may be used to increase your overall income and boost your borrowing power. Thus, it helps you better qualify for a home loan.
Some jobs grant regular (monthly, quarterly, or annual) bonuses on top of your salary. In general, if you can prove a two-year history of bonuses as well as some form of documentation that demonstrates that the bonuses are regular and expected to continue, a lender may accept this as bonus income.
Unfortunately, the one-time performance bonus is usually not considered during the loan underwriting process. Even though these one-time irregular bonuses may not help you qualify for a mortgage, be sure to use these extra funds to pay down your home loan when you can.
If you work in sales, part, if not most, of your income may be based on commissions. Unfortunately, commissions fluctuate and make it more challenging to demonstrate predictable and reliable income.
Depending on the loan program, commissions likely fall into the same category as regular bonuses. The borrower must demonstrate consistent commission income over the previous two years. He must also prove the likelihood for that commission income to continue in the future.
For example, you may include a letter from your employer that explains the commission income structure of your position. The goal is to demonstrate that the borrower has every opportunity to realistically continue to make this commissioned income in the future.
If you are a shift worker, overtime hours can be a regular part of your job. In some cases, it can significantly boost your income.
Some lenders and loan programs, such as an FHA loan, consider overtime income and bonus payments to be in the same group. For example, according to HUD 4000.1, a borrower must average the overtime income earned over the previous two years for an FHA loan.
If you receive rental income from an investment property, lenders may include that amount when determining your borrower power. Of course, you will need to establish a history of rental income as well as documentation that it is likely to continue.
In general, lenders will want to see your last two years of tax returns, including IRS Form 1040 and Schedule E. If accepted, banks will likely only use a portion of your rental income, such as 75 percent, when determining your borrower power.
Lenders want evidence that you can afford the mortgage payments. The one-time bonus is not enough to reliably demonstrate a sufficient debt-to-income ratio. Instead, banks prefer regular bonus income with the proper evidence to support your case.
The precise guidelines of how lenders view bonus income, documents required, and the amount that is included when determining your mortgage affordability, vary by lender, loan program, and property type. It is recommended to speak to a few different lenders to see your options. Each lender has different criteria for accepting sources of bonus income.