Overtime income is becoming more and more popular today, but that does not mean it will automatically give you the approval you need on your mortgage. If you do not handle it correctly, it will not help your case. Lenders cannot take overtime income at its face value and add it to your base income. There is a process they must go through to ensure that the income is stable, has a history, and has a plausible future.
Determining the Amount
The first step lenders must do is determine the difference between your base income and your overtime. Sometimes this is not as easy as its sounds, especially if you are providing W-2s and tax returns as there is no differentiation on those documents. Your paystubs will clearly mark the difference between the two types of income, but lenders usually try to annualize overtime income, with some lenders using as much as 2-year average to truly get a feel for how many extra hours you work over a period of time.
The easiest way for lenders to determine the amount of money you make in overtime is to request a Verification of Employment. This form, which gets filled out by your employer, breaks down each type of income so the lender can get a good idea of how often you work overtime. If you only work it occasionally, the income might not be able to be used at all. On the other hand, if there is consistent receipt of the income, you might be able to use it to qualify for a mortgage.
Overtime must Increase
Just like lenders want to see stable income, if your overtime is going to be used for qualification purposes, it must increase over time. For example, if a lender requires a 2-year average in order to use overtime, you should have a steady stream of this type of income or an increasing amount to use. If it is $5,000 one year and $2,000 the next, the lender might not use it at all. If they do, they will definitely take a 2-year average in order to take into account the lower income you made in the 2nd year, but you would have to prove that you were making overtime currently and that you were on course to make at least $2,000, if not more.
Proving your Overtime Income
The most important thing to remember is that you have to prove your overtime income in order for it to be used. This could include providing documents, such as:
- Current paystubs that show your YTD overtime hours and income
- The previous 2 years’ worth of tax returns and W-2s to confirm the total income, even though overtime cannot be determined from these documents
- A Verification of Employment completed by your employer and/or the final paystub from the previous two years to show the breakdown of your final overtime income for that year
Overtime income can be the reason you get approved for a mortgage, so it is worth the effort it takes to prove your receipt of it. If you are planning to purchase a house in the future, you can start planning now by determining the consistency of the income and how you will prove it to a lender. Every lender and every program has different requirements regarding this income. The common denominator with any program, however, is that you have to be able to prove the income separately from your base income. Without proper proof, it cannot be included and could make your debt ratio too high to qualify – so getting your paperwork and evidence ready is well worth the effort!