Bonus Income and Mortgages: Are You Eligible for Approval?

Exploring how lenders handle bonus income in mortgage calculations.

Bonus income can be a crucial part of a borrower’s qualifying income when applying for a mortgage. However, its acceptance as a reliable income depends on several factors, such as the length of time the income has been received, its consistency, and whether it is expected to continue.

Key Agency Guidelines:

Fannie Mae:

• History of Receipt: A minimum of 12 months of bonus income is required for it to be considered stable.
• Continuance: The income is assumed to continue unless there is evidence to suggest otherwise.
• Calculation: Bonus income is averaged over the relevant time period unless there’s a declining trend. If declining, the current lower income is used.
• Documentation: Requires verification of employment (VOE) or W-2s for the most recent two years.

Freddie Mac:

• History of Receipt: Two years of consecutive receipt is required.
• Continuance: The bonus must likely continue for at least three more years.
• Calculation: If bonus income increases significantly (more than 10% from the previous year), further analysis is required to confirm stability. Declining income may not be used unless justified.
• Documentation: Year-to-date pay stubs and W-2 forms for the past two years, along with a verbal verification of employment (VOE).

FHA:

• History of Receipt: Bonus income must have been received for at least one year, though two years is recommended.
• Continuance: The income must be expected to continue.
• Calculation: The lesser of the average bonus over the past year or two years is used.
• Documentation: Like Fannie Mae, lenders must provide VOEs and tax documentation.

VA:

• History of Receipt: Generally requires a two-year history to consider bonus income as stable.
• Continuance: Must be reasonably expected to continue.
• Calculation: Similar documentation and analysis as FHA.
• USDA:
• History of Receipt: Guidelines tend to follow those of other agencies, requiring a stable history.
• Documentation: Requires tax returns and transcripts for household members aged 18 or older.

General Considerations for Lenders:

Many lenders impose overlays or additional requirements to those set by the agencies. For example, some lenders might require a signed 4506-C form (used to request tax return transcripts) at closing, and others may mandate verbal verification of employment shortly before finalizing the mortgage.

Why These Guidelines Matter:

Mortgage lenders place a strong emphasis on the stability and predictability of income. Bonus income can vary significantly from year to year, which presents a challenge in determining how much of it can be considered reliable for mortgage purposes. The specific guidelines laid out by each agency aim to balance the use of this variable income while protecting both the borrower and the lender from future financial risks.

By understanding the criteria each agency uses to evaluate bonus income, borrowers can better prepare their documentation and ensure that their mortgage application is processed smoothly.

About Us

At Innovative Mortgage Brokers, our mission is to simplify the mortgage process for borrowers in Pennsylvania and Florida. With over 15 years of industry experience, we pride ourselves on offering a wide range of mortgage solutions tailored to fit your unique financial needs. Whether you’re a first-time homebuyer, refinancing, or looking to invest, we provide expert guidance and personalized service every step of the way. Our commitment to transparency, competitive rates, and building long-term relationships with our clients sets us apart from larger, impersonal lenders.

We work with a variety of loan products, from conventional and FHA loans to specialized Non-QM options like DSCR and bank statement loans. Our goal is to make homeownership accessible and stress-free for all our clients.

Final Thoughts

Navigating the mortgage process, particularly when dealing with variable income like bonuses, can seem overwhelming. But by partnering with a knowledgeable and experienced team like Innovative Mortgage Brokers, you can confidently move through the process with clarity and support. Whether you’re a first-time homebuyer or an experienced homeowner, understanding how bonus income and other factors impact your mortgage approval can help you make informed decisions and secure the best loan for your needs. We’re here to guide you through every step, ensuring that your path to homeownership is smooth and successful.