Applying for a mortgage? Not all income counts

House on stack of bills

Although the subprime mortgage crisis might have taught us otherwise, most lenders only want to give you a mortgage if there’s a good chance you can pay back the loan.

Banks ask applicants to prove they have enough money coming in to afford monthly payments.

But not all income counts toward the official number that banks use, and some income counts only under particular circumstances.

Here's a look at some different forms of income and how lenders treat it:

Salary or hourly wages. This one is pretty straightforward. If your employer pays you the same amount every two weeks, the bank counts it as income.

Commission, overtime and bonus income. Your bank will probably count this if you’ve received it for the last two years and if your employer will write a letter saying the payments are likely to continue.

Part-time or second-job income. Most lenders won’t add this income to the total unless you’ve had it for a year or two.

Retirement and Social Security income. You’ll need to show the bank such retirement income is likely to continue for at least three years.

Alimony and child support. The bank will probably want you to show that you’ve received this income for the past year and that the amount isn’t set to decrease during the next three years. You may need a copy of your divorce decree and proof of on-time payments. (You don’t have to reveal alimony and child support payments at all; it’s up to you.)

Rental income. It counts -- but only if it comes from an investment property. The bank won’t consider rent you get from a roommate who lives with you in your primary residence.

Seasonal employment. The lender probably will count this income if it happens every year and can reasonably be expected to continue.

Educational expense reimbursement. Banks don’t consider this income. On the other hand, banks will count the automobile allowance and expense account reimbursement that your employer might pay you, as long as you can verify it through your tax returns.

Garage sales, temporary jobs and other one-time income sources. These never count. Banks are interested in recurring income sources, not one-off situations. But you can add income from these sources to the money you save for your down payment. Larger down payments often mean lower financing costs and lender fees -- and a bigger down payment means you’ll need to borrow less.

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