Do you work overtime every now and then? Do you need that money to help you qualify for a slightly larger mortgage or maybe a mortgage at all?
The good news is that you may be able to use your overtime to qualify for a mortgage. The bad news is that you must meet certain requirements in order to do so.
The Length of Time
First, you can’t use overtime that you just started receiving. Just like your regular income, lenders need to see a history of receipt of the income. Just how long you must receive it will depend on the lender. Some lenders allow the use of overtime income that you’ve received for just one year, while others make you wait two years.
What’s the difference and why do you have to wait so long? It has to do with consistency and reliability. If you only work overtime once in a while and it’s not a consistent thing, lenders won’t use it to qualify you for a mortgage. They can’t rely on it if it’s not something you receive on a regular basis. On the other hand, if you have been working overtime for the last two years, lenders can see a pattern, and figure out how much overtime to include in your qualifying income.
Consistency of Your Overtime Income
Lenders need to see consistency in your overtime income over a period of months or years. What they want to see is stable and/or increasing income. If your overtime income seems to wane after a few months or there was a decrease from one year to the next, they may not be able to use it to qualify you for the loan.
Calculating Your Overtime Income
First, your lender will need to figure out which portion of your income is overtime. Using your W-2s or tax returns won’t suffice. While these documents show your total income received, they don’t break it down between regular and overtime income.
Instead, lenders will use your paystubs. Typically, you have to provide two paystubs, but you may need to provide more so that they can see the pattern of receipt of overtime income. Once the lender sees which income is overtime income, they will average the receipt over two years or however many years you’ve been receiving it. This allows lenders to account for the highs and lows. In other words, they can account for the times that you work overtime and the times that you don’t work overtime.
If a lender were to qualify you based on a recent period when you worked a lot of overtime, but you don’t have a history of working that much overtime, it could turn out bad in the end. If you become unable to afford your mortgage payment because the lender qualified you for too much, it could result in the loss of your home. If the lender uses an average, though, they can rest assured that they found the ‘happy medium’ and qualified you for a loan that you can afford.
One other large piece of the puzzle is proving the continuance of the overtime income. While no one can predict the future, lenders need to know that your overtime will continue for the next three years, for as far as they can see.
You can obtain this proof from your employer themselves. They need to complete what’s called a Verification of Employment. This form acknowledges your dates of employment as well as your income. On this document, your employer must state that your overtime is likely to continue for the next few years. While your lender realizes things can change, they need that reassurance from your employer in order to use your income.
Using overtime income is possible when all of the pieces of the puzzle fit. Talk to your lender about your overtime income and give them as many details as possible about it. The more they know about it, the more accurate an answer they can provide you for your loan.