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Are you finally hoping to realize your dream of home ownership, but your income isn’t primarily employment based? Don’t give up hope. You can still qualify for a mortgage using investment income. There’s just a little extra documentation involved.
If you are supporting yourself wholly or partially on investment income, and have been for some years, you have a better chance of showing a lender that you’re likely to be able to maintain your level of income from your investments. Be prepared to answer a lot of questions when trying to get a mortgage with investment income.
Your income is what lets a lender know you will be likely to make your regular mortgage payments once the home is purchased. When you have a regular job as an employee, you can show your pay stubs and tax documents to show your steady rate of income and that you are stable financially.
When you have investment income, things can seem a little more precarious. Investment income can be fickle and a lot depends on circumstances outside of your control. This means that a lot of documentation requests will be forthcoming. Don’t give up hope, however; you can still qualify for a mortgage.
General income qualification requirements vary based on your source of income. If you are an hourly or salaried employee, your paystubs, tax records and a statement from your employer will likely be sufficient. If you’re self-employed, you may need extra years of tax records, profit and loss statements, and a letter from your accountant.
If you’re qualifying for your mortgage on a mix of traditional and investment income, or income from investments alone, you’ll simply need to document your additional income streams thoroughly and then the lender will decide how solid they believe the investment income is.
The goal is to be able to identify your income as being stable, predictable,. And likely to continue. The longer you can show your income has been steady, the more likely it is that they will consider it to be a good risk going forward. Depending on other factors, like your credit score, you may need to carry private mortgage insurance as well (PMI.)
In most cases, the types of investment income that can be used for mortgage qualification include dividends and interest solely. You can use these types of investment income to qualify for all major types of home loans including FHA, VA, conventional, and USDA mortgages.
To prove your investment income, you’ll need to provide documentation that verifies:
You must be able to prove you own the assets which are generating the dividend and interest payments (this can be proven with recent account statements that show both what funds you have available and that they are in your name)
Once you’ve proven asset ownership, you need to show that you have been receiving it for at least two years, and that you are likely to continue receiving it for at least three more years.
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.
If you have just started accepting distributions from your investments, and have received several month’s worth with plenty more upcoming, you may be able to skate on showing the two years of income. You’ll need the arrangement in writing to use this to qualify for a loan.
If you’re planning on pulling some of your investment money out of the market to use for your down payment, you’ll need to remember that your projected earnings will be going down. This is important because it would affect your debt-to-income ratio (DTI.)
For example, suppose your portfolio is worth $2 million, and your annual investment income is $100,000. If you pull $400,000 to use as a down payment, you’ve reduced your principal by 20%. Now your projected annual income may be reduced by the same percentage, meaning you are now at $80,000.
You might want to consider other options for your down payment, such as your 401k. Since it’s your money, you can use it without affecting your DTI ratio.
Investment income is calculated by the lender, not you, for mortgage qualification. If you want to use interest and dividends income to qualify for your mortgage, you’ll need to prove the income is stable and ongoing.
A two-year history of the income can usually be proven by either your signed federal income tax returns, or with your most recent account statements.
Your lender will develop an average for the past two years. They will have to deduct assets used for your down payment or closing costs from your assets first, then calculate your expected future dividend or interest income.
You can rarely use capital gains as proof of income to get approved for a mortgage. Using capital gains as income to qualify for the loan is very different from using capital gains as a down payment on a home.
Since capital gains are typically derived from a one-time asset sale, they are easy to use as your down payment. You simply show evidence that you completed the sale and have the funds in hand before closing.
If you want to use capital gains income, you’ll need to be able to prove that your income will be ongoing and stable. This means providing documentation showing a two-year history of capital gains income. Typically your mortgage lender will ask to see signed federal income tax returns for the most recent two years, specifically IRS Form 1040, Schedule D. Capital losses on Schedule D don’t have to be taken into account.
The income will be averaged and the averaged amount will be used as your income (although you’ll have to show you have assets you could sell to make mortgage payment if necessary.) All documentation of the asset ownership must comply with the Allowable Age of Credit Documents policy (usually required to be less than 60 days old.)
You will also be required to demonstrate that you have sufficient assets to earn similar capital gains in the future. If you can’t show past and future stability and assets, your capital gains will likely be excluded from your investment income for mortgage qualification purposes.
In some cases, only a year’s worth of investment income needs to be documented for your home loan. Your loan officer can clarify the requirements based on the loan type you are applying for. Not sure what your monthly budget can cover? You can use our mortgage calculator to determine what your mortgage payment might be and what you’d need to make ends meet.
Our loan officers can help you evaluate your investment income, and tell you if it would likely qualify you for a portage or not. We can also help you get preapproved for a loan and walk you through the process.
Sammamish Mortgage has been in business since 1992, and has assisted many home buyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.
Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.
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