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Can stipend income be used to qualify for a mortgage?

Can stipend income be used to qualify for a mortgage?
Written by Publishing Team

No salary income to calculate the mortgage?

When applying for a mortgage loan, borrowers need to prove sufficient income to prove they are able to repay the loan.

But not every borrower earns a traditional salary or hourly wage. Some borrowers receive income payments from a company, school, or organization.

Lenders do not usually count salary income toward a mortgage because it is only temporary. But if your salary income continues in the long term, it may help you qualify.

Here’s what you should know if you’re earning a salary and hoping to buy or refinance a home.

Check your eligibility for a mortgage (January 15, 2022)


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Income Salary and Mortgages

Usually, lenders will not consider short-term salary income for mortgage applications because the income is only temporary.

“However, lenders may consider long-term salary income to help you qualify for financing,” says LenderHomePage CEO Rocky Furutan.

“For a Fannie Mae subsidized loan, for example, Fannie Mae requires documentation of income received for the last 12 months and proof that will last at least another three years for salary income to be credited to the application.”

Joe Biro, CEO and founder of Sovereign Linding Group, agrees.

Salary income may help you qualify for a mortgage if it lasts for at least three years.

“If you can provide documentation to verify that you have ongoing monthly salary payments that will last for at least three years, you can use your salary to help qualify for a mortgage loan, if the lender allows it,” he notes.

General living stipends can be used to qualify for a mortgage loan with some loan providers.

“Healthcare workers are often given a living stipend that can be considered reliable and large enough to be considered in a loan application. Members of the clergy or workers in charitable organizations or the not-for-profit industry also receive a living stipend of this type, being categorized as charitable public institutions,” Furutan continues.

“However,” he warns, “only a few lenders will accept this form of income for loan applications.”

Check your eligibility for a mortgage (January 15, 2022)

Salary income explained

If you are hoping to take out a mortgage loan as a source of salary, it is important that you understand what lenders consider salary income.

Salary income is a form of payment given or granted by a company, corporation, or other organization for providing a service or maintaining a certain status—such as being a college student or an intern working for a business.

This income does not represent wages earned; It is separate from salary and designed to help reduce the financial burden on the recipient. For example, housing allowance is a type of salary.

“Employers sometimes provide stipends for things like additional education, travel, accommodation, board and board, and health insurance,” explains Foroutan.

“The key to understanding salary is that it is a form of payment usually in exchange for a service of some kind. In general, a stipend is given to anyone who does not qualify for a salary but needs money to cover living expenses. For this reason the most common salary recipients are interns, fellows, clergy, apprentices, civil servants, graduate assistants, and medical students.”

Pirro adds that salary is often given a fixed amount of payment each month and is usually considered taxable income.

“Pensions, disability benefits, retirement account withdrawals, child support, and alimony are not considered salary income,” says Pirro.

Instead, it is categorized as unearned income that can be assessed as compensating factors that can help you qualify for a mortgage loan.

How salary income can help you qualify

Remember that lenders do not look at income on their own when deciding whether to approve a mortgage.

Instead, they look at the income in relation to your monthly debt. This is known as the “debt-to-income ratio” or “DTI”.

Brian Martucci, finance editor at Money Crashers, says salary income generally cannot be added to the amount of income that lenders consider when calculating the debt-to-income ratio (DTI) and determining whether to approve your mortgage application.

Most loan programs have a strict DTI limit that does not allow you to exceed 43 percent. The more income you earn, the more mortgage you can qualify for based on your DTI.

Salary income will not count directly as income, and therefore will not reduce your debt ratio.

“But,” says Martucci, “it can be used as a compensating factor that, in practice, may increase your chances of qualifying for the loan.”

Understanding Compensatory Factors

“Compensation factors are adjustments that lenders can make to the loan application to make the borrower appear more favorable based on his or her financial history,” says Forotan.

In other words, it’s financial strengths that make up for any weaknesses in the mortgage application.

Salary income can be used as a compensating factor that may, in practice, increase your chances of qualifying for the loan.

There are several different types of compensatory factors that can help you qualify for a home purchase loan.

For example, if you have savings (“cash reserves”) equal to 3 to 6 monthly mortgage payments plus other housing expenses, your lender may be able to allow for more DTI.

Other compensating factors include rent, fixed payment history, additional income such as bonuses or overtime, residual income, and long-term salary income.

Salary income as a compensating factor

“Salary income can also be identified as a compensating factor, allowing your lender to extend your DTI a bit to provide for the facility,” Vorotan says.

But using income as a compensating factor can only go so far. If you have poor credit, a bad repayment history, or a really high debt, nothing like a salary will improve your eligibility for a borrower or lower the interest rate.”

In order to get the best possible deal, you will need to strengthen your application in other areas.

This can include increasing your credit score, saving for a larger down payment, or paying off existing debts such as credit cards or student loans.

Of course, it’s hard to do all of these things at once. But choose the areas where you can have the greatest impact. Improving your personal finances even just a little bit can go a long way when it comes to loan approval.

Types of income that can be used to qualify for a mortgage

Since salary income only counts as a compensating factor for mortgage qualification, you will need a primary source of income to be eligible for the loan.

This doesn’t mean you need a traditional W-2 job. Many different types of income can be counted in a mortgage application

These include:

“Salary income is one of the few types of recurring income that typically cannot be used to qualify for a mortgage loan unless it is an ongoing, long-term type of salary,” Martucci warns.

“Sudden income, such as gambling or winning the lottery, is another broader category of income that mortgage lenders will not consider unless it recurs.”

If you’re not sure if your income is important to a home loan, talk to a lender or mortgage broker.

Your loan officer will look at each source of income you earn and determine your eligibility for a mortgage.

Check your eligibility for a mortgage (January 15, 2022)

Buying a home with a borrower

First-time homebuyers who earn a salary income may have a hard time qualifying for a mortgage on their own.

If you do not qualify for salary and earn Just Salary income, it is likely that the lenders will not be able to approve you.

This is where a co-borrower can come in handy.

Purchasing with a spouse, family member, or close friend who works full-time and on salaries allows both of you to qualify for the loan based on your combined income and credit history.

You can buy a home based on your borrowers’ income, as your salary income will potentially act as a compensating factor.

In this case, you and your borrowing partner will be responsible for the monthly payments on the home and will share in any equity gains.

Eligibility for a Mortgage Loan with Unconventional Income

If you are self-employed or work at gig, you are earning a non-traditional income. In these cases, you may need to apply for a non-qualified (non-QM) mortgage. These types of loans are designed for those who have cash assets to purchase a home but do not have proof of stable income.

There are a few things loan officers evaluate to check income for non-qualified mortgage loans. These include personal tax returns, business tax returns, and business profit and loss statements signed over the past few years,” says Forotan. “Lenders may also look closely at your bank statements.”

In general, be prepared to provide verification documents that show three years of continuous non-traditional income as well as offsetting factors such as health reserve savings.

“Documentation is key. You want to be able to demonstrate that your income streams are consistent and relatively long-lived, and you may need to demonstrate that you are obligated to receive this income — including salary income — in the future,” Martucci adds.

Check your eligibility for a home loan

Every real estate borrower is unique. Salary income may or may not count toward your mortgage loan depending on your financial situation.

Only a mortgage lender can tell you for sure whether you qualify or not. So, if you are ready to start your home search, your first step should be to get pre-approved for a home loan.

A pre-approval from a mortgage lender will verify your home purchase eligibility as well as your budget and mortgage interest rate. If you’re ready to get serious about buying a home, you can start below.

Check the new price (Jan 15, 2022)

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