Can I qualify for a mortgage with investment income?
When it comes to getting a mortgage, every piece of income used to qualify needs to be thoroughly documented and vetted.
For hourly or salaried employees who receive paycheck stubs, calculating income is fairly straightforward.
But the process is a little more complicated if you want to use investment income for mortgage qualification.
You’re allowed to count dividends and interest toward your income.
But the lender might not count the full amount — and it will ask for plenty of extra documents. Here’s what to know.
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General income qualification requirements
Likely, you’re not qualifying for a mortgage based on investment income alone.
If that’s the case, you’ll have to document any other income streams being used for mortgage qualification.
Regardless of the type of income, Fannie Mae instructs lenders to look for income that is “stable, predictable, and likely to continue.”
For mortgage borrowers who earn a salary or regular wage, that requirement is generally not difficult. Paystubs and W-2s are usually all that’s needed to document their income history. And, their employer can usually assist in verifying the likelihood of continued employmentFor self-employed workers, documenting income can be more challenging. Still, bank statements, profit and loss statements, and previous years’ tax returns are typically a good indication of stability and predictability of continued income
When it comes to income generated from your investments, the rules are a little more complex.
Unlike the income from a job, you can’t rely on pay stubs or W2s. Nor can you reach out to an employer for clarification.
That means you’ll have to jump through a few extra hoops to document the source and stability of your investment income.
Types of investment income that can be used for mortgage qualification
Typically, there are only two forms of investment income that can be used for mortgage qualification — dividends and interest.
Dividends and interest from investments can be used to qualify for any of the major mortgage types: conventional, FHA, VA, and USDA.
Documenting investment income
In order to accept investment income, lenders will first need proof that you truly own whatever assets are generating the dividend and interest payments.
This is done by providing recent account statements showing the funds you have available and in your name.
Following proof of asset ownership, the general rule is that you must have been receiving it for at least two years. And, it must continue for at least three more.
You must provide documents showing the interest and dividend income that you received from your assets during the last two years. So, prepare to have your tax returns along with all schedules ready.
There are some cases where you may have recently starting taking a distribution from your investments.
As long as the arrangement is in writing and you have received a few months’ worth of payments, you may be able to use this to qualify for a loan.
How is investment income calculated for mortgage qualification?
If you plan to use investment income for mortgage qualification, lenders will want to see at least two years — maybe three years — worth of income tax returns.
Lenders will generally average the income you’ve earned from dividends and interest over those 2-3 years.
2018: $90,000 interest/dividend income
2019: $70,000 interest/dividend income
Qualifying income: $80,000 per year
Sounds simple enough, right? Maybe not. Read on.
Discounting investment income
The above scenario might not be a slam dunk. Income went down in the most recent year. The underwriter will need to verify why it went down, and if it will continue to go down in coming years.
Investment income may sometimes be discounted because it’s considered unstable.
Also, remember that dividend and interest income is based on the amount of principal in the investment. If you plan to use some of that principal for a down payment or closing costs, the lender will calculate based on the future amount.
For example, say you are making $4,000 per month from a $1 million investment. But you are putting $250,000 down on a home, the source of which is that investment.
The lender will likely let you qualify with just $3,000 per month investment income (a reduction of 25%, which matches the reduction of principal).
That means you may have less qualifying income than you first thought.
Be ready to prove your income
Regardless of the type of income you plan to use for mortgage qualifying, be prepared to document it extensively.
And, although income generated from investments is just as good as income received from a job, documenting it can be a bit trickier than other sources of income.
Ask your lender up front for the type of documentation that will be required, and make sure you have it ready to go when the time comes.
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