Can You Use Bonus Income to Qualify for a Loan?

Real Estate

Yes, you can.  But the bonus income needs to follow a few rules, first.  Employees get paid in different ways.  The most common is a regular paycheck on the 1st and the 15th of each month or maybe every other week.  One of the primary responsibilities of a mortgage lender when evaluating a loan application is to make the determination the borrowers have the ability to repay the new mortgage along with any existing monthly credit obligations.  The process is relatively simple.  The lender compares total monthly credit obligations with gross monthly income.  When calculating the mortgage payment, which includes an amount for taxes and insurance, lenders like to see this amount be somewhere near 28-33 percent of gross income and closer to 41 percent when including all monthly payments.

Lenders then verify income by reviewing the most recent paycheck stubs covering a 30 day period.  The stubs will show the gross income, deductions and net pay.  It will also show a year-to-date amount.  In addition, copies of your last two years of W2 forms will be needed.  Lending guidelines require there be at least a two-year history of employment and then make the determination the income is likely to continue into the future.  If someone is self-employed, then the last two years of personal and business income tax returns will be reviewed along with a year-to-date profit and loss statement.

Okay, but what about a bonus?  Can that be used if needed?  Guidelines for bonus income follow the same type of review as other types of income.  Is there a history of receiving bonus income?  There needs to be verification the bonus income has been received for two years.  In addition, the bonus income needs to be regular and of a similar amount each time.  Let's say an employee gets a bonus each quarter for reaching a particular goal.  The bonus amount is $1,000.  The lender will need verification this amount has been received for the past two years.  With this history, the lender can reasonably determine the bonus is likely to continue.  Using this example, there is an additional $333 per month than can help the  borrowers qualify.

If on the other hand, the bonus amounts vary in amount or frequency, it's possible the income cannot be used, even though there is evidence the employee has received it.  Or, the bonus might be an annual bonus paid at the first of every year.  In this instance, the additional income can't help, even though it's been the same for the past two years.  Why?  Because a bonus paid in January probably might not be around come August or September.

One final note about bonus income - if more than 25 percent of the individual's income comes from a bonus or a commission, that person is then considered self-employed and will be underwritten as such.  If you're planning on using your bonus income to help qualify, it's a good idea to speak with your loan officer first to see how you'll need to document this additional income. 

Call me to put you in touch with a lender for a free, no obligation consultation about qualifying for a  home loan.