You need income in order to qualify for a VA loan. But did you know that there are many different types of acceptable income sources? You don’t have to have a salaried job position in order to qualify.
Keep reading to learn if your source of income is an acceptable source for a VA loan.
A majority of borrowers have salaried income. This is the easiest income for a lender to verify and use for qualifying purposes. Lenders take your gross annual salary and divide it by 12 to determine your gross monthly income.
For example, if you make $75,000 per year, your gross monthly income equals $6,250. Salaried income is also one of the easier incomes to verify. You provide your pay stubs and W-2s and lenders can determine your gross income. If you recently started a new position, you can provide your offer letter that states the amount of annual income you are set to receive.
If you work on an hourly basis, chances are the lender can accept your income as long as they can verify it. Because hourly income can vary from month to month, lenders usually take a 2-year average of your income. They use your pay stubs and W-2s to determine your 2-year average.
For example, a lender will likely use your last 2 years of W-2s to determine your gross income for that 2-year period. They then divide that amount by 24 months. Let’s say your total income for 2 years was $95,000, your gross monthly income would equal $3,958. The lender would then compare this amount to your current pay stubs to make sure you are on track to make that amount this year too.
Lenders have to be a little more cautious with hourly income only because it can vary with seasons, business cycles, or many other factors that pertain to an individual business.
Commission income is another income that varies often. Lenders usually use your tax returns to verify this income rather than just W-2s. They need to verify that you don’t have any unreimbursed employee expenses reported on your tax returns. If you do, they will deduct that amount from your gross income. Keep in mind, lenders can only use the amount of the income you claim on your taxes. If you take a lot of deductions due to your commission structure, it could hurt your chances of loan approval.
Just like hourly employees, lenders take a 2-year average of your income. This allows them to account for the highs and lows you likely experience throughout the year. This eliminates the risk of qualifying you for too much loan based on a ‘high’ period of commissions and cutting you short basing your loan amount on a ‘low’ period of income.
Working for yourself is perfectly acceptable and even admirable, but it can cause an issue with your qualifying income. Just like with commission income, lenders need to see your last 2 years of tax returns. This allows them to see which expenses you deduct. Again, these expenses will get deducted from your gross annual income for qualifying purposes.
Because lenders go back two years, you may want to try limiting your deductions for the two years leading up to your loan application. Lenders can only use the adjusted gross income on your tax returns when they have to use tax returns for qualifying purposes. If you know you’ll likely apply for a mortgage, consider limiting those deductions.
Even though you aren’t working doesn’t mean you don’t make an income. As long as you can provide that, you receive retirement income and that it will continue for at least 3 years, you can use it for a VA loan. This includes 401K, IRA, social security, and pension income. Your award letter or investment statements often suffice as proof of the income you should receive. You must also document actual receipt of the income, though, which you can do with your bank statements. Lenders need to see that you receive the income consistently.
If you rent out a home or even a unit in your multi-unit property, you may be able to use it for income. In order to do so, though, you must have a history of receiving the income. You can’t claim rental income you just started receiving 2 months ago, for example.
Lenders want to know that you have experience as a landlord and are capable of managing the property. An executed lease agreement, canceled checks, and copies of your bank statements may suffice as proof of the intended income as well as receipt of it.
Child Support or Alimony
If you receive child support or alimony, you aren’t required to report it as income, but you can if it will help you qualify for the loan. In order for it to qualify, though, you must have proof of the amount you are supposed to receive as well as proof of receipt.
The court order is the best way to prove how much you are supposed to receive. Lenders need official proof of the amount, so a verbal agreement or even a non-official written agreement won’t work. The lender also needs proof that the income will continue for at least 3 years. For example, if you receive child support and your child is 17 years old, you won’t be able to use that income for qualifying purposes. If your child is 7 years old, though, you will likely be able to use it as long as the order states you’ll receive the income until your child is 18 years old.
Just like any other income that is ‘out of the ordinary,’ you’ll have to prove receipt of the income with your bank statements. The number of bank statements a lender requires may vary by lender. They want proof that you consistently receive the child support or alimony in order to include it.
If you are permanently disabled and receive income from your state, you may use it for qualifying purposes. Again, the lender needs to know how much you receive, when you receive it, and for how long. Providing your award letter should provide all of these details. Your bank statements can then provide the proof of receipt.
Income That Won’t Count
Just as there are many types of income you can use for a VA loan, there are also several you cannot use. They include:
- Income from a job you just started
- Income from a part-time job you’ve held for less than 2 years
- Unemployment compensation
- Any income that won’t continue for the foreseeable future
The bottom line is that your income must be reliable and consistent. The lender must be able to prove this beyond a reasonable doubt in order to be able to provide you with a VA loan. The more documentation you can provide a lender, the more likely it is that your income will be acceptable.