Faith Morrow
Whether or not a bonus counts as income for a loan depends on the lender and the type of loan. Bonuses can be considered as income for a loan if the borrower has received them consistently for at least one or two years, and the employer indicates they are likely to continue. Lenders will also consider the frequency and amount of the bonus income, with some requiring verification of employment for at least two years. It is important to note that if more than 25% of an individual's income comes from bonuses, they may be considered self-employed and underwritten as such.
| Characteristics | Values |
|---|---|
| Bonus income counted as income for loans | Yes |
| Minimum bonus income history required | 12 months (Fannie Mae conventional loans with strong compensating factors) to 24 months (most other loans) |
| Maximum bonus income history required | 24 months |
| Additional requirements | Regular history of receiving bonuses, likelihood of bonuses continuing, verification of employment from the company |
| Self-employed | If more than 25% of income comes from bonuses, the individual is considered self-employed |
| Lenders | Some lenders may not accept bonuses as part of income |
| RSU income | Some lenders consider RSU income along with bonuses |
What You'll Learn
Lenders' criteria for bonus income
Bonus income can be used to qualify for a home loan, but it depends on the lender and the type of loan. Some lenders will consider bonus income as qualifying income, while others will not. It's important to shop around and compare options when qualifying with bonus income because the mortgage lender you choose will impact your home-buying budget.
Lenders have specific guidelines in place for bonus income, and these guidelines will determine the documents you need to supply. Generally, you should try to provide as many documents as you can. Most lenders will require some or all of the following:
- Two current consecutive payslips
- A letter of entitlement from your employer or a letter confirming that your bonuses are likely to continue
- Your most recent tax return or group certificate; in some cases, two years of tax returns may be required
- Documentation supporting your bonus income on pay stubs, W2s, and tax returns
- Verification that you have received bonus income for at least one or two years, depending on the lender and loan type
- Evidence that your bonus income is regular and of a similar amount each time
If more than 25% of your income comes from bonuses or commissions, you may be considered self-employed and will be underwritten as such. In this case, you should speak with your loan officer to see how you need to document this additional income.
Some lenders may also consider restricted stock units (RSUs) as qualifying income, but this can be more complicated as the value of your stock units will vary based on your company's stock prices. Lenders typically use a 52-week average stock price to calculate your income from RSUs.
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Bonus income and self-employment
When it comes to bonus income and self-employment, there are a few key things to keep in mind. Firstly, if an individual receives a significant portion of their income from bonuses or commissions, they may be classified as self-employed. In the United States, if more than 25% of a person's income comes from bonuses or commissions, they are typically considered self-employed for underwriting purposes. This distinction is important when applying for loans, as self-employed individuals may face different requirements and criteria when compared to traditional employees.
When applying for a loan, lenders will generally consider both traditional employment income and self-employment income. For self-employed individuals, this typically includes income from sources such as business profits, partnerships, S corporations, estates, and retirement accounts. Lenders may also take into account other forms of income, such as rental income or investment income, which can supplement an individual's overall financial profile.
To verify self-employment income, lenders will often request various forms of documentation. This typically includes tax returns, such as Schedule C (Form 1040) for profit or loss from a business, or Schedule K-1 for income from partnerships, S corporations, and estates. Lenders may also request additional documentation, such as pay stubs, W-2 forms, or 1099 forms, to support claims of self-employment income. A verbal verification of employment (VOE) may also be required for each source of income.
It is important to note that lenders typically have specific guidelines in place for evaluating self-employment income. They may consider factors such as the history of receiving bonus income, the regularity and amount of bonuses, and the likelihood of bonuses continuing in the future. In some cases, lenders may only consider bonus income if there is a consistent pattern over a period of at least two years. Additionally, self-employed individuals may be subject to self-employment tax, which can impact their overall income and tax obligations.
While bonus income can be considered when applying for a loan, it is generally viewed as supplemental to an individual's base income. Lenders often place more weight on stable and consistent sources of income, such as base pay or wages. However, by providing the necessary documentation and speaking with a loan officer, individuals can increase the likelihood of their bonus income being included in their overall financial assessment.
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How bonus income is calculated
When applying for a loan, your bonus income can be considered as part of your total income. However, there are specific guidelines that lenders use to determine how bonus income is calculated and whether it can be included.
Firstly, lenders typically require verification of a history of receiving bonus income. This usually means providing evidence of receiving a bonus for at least two years. The bonus income also needs to be regular and of a similar amount. Lenders will also want to see documentation supporting your bonus income, such as pay stubs, W-2s, and tax returns. Additionally, they will consider the likelihood of your bonuses continuing in the future, which is often defined by a written verification of employment from your company.
If you are self-employed and receive income primarily through bonuses or commissions, some lenders may have specific requirements and considerations for evaluating your loan application. It is important to speak with your loan officer to understand how your bonus income will be assessed and what additional documentation you may need to provide.
When calculating bonus income, lenders typically take the total amount of bonus income received over the past two years and divide it by 24 months to determine a monthly income amount. This calculation helps determine your overall income stability and eligibility for the loan.
It is worth noting that different types of bonuses may have unique calculations. For example, sales commission bonuses are performance-based and calculated by multiplying the amount earned by the bonus percentage. Sign-on bonuses are usually negotiated during the hiring process and paid to new employees upon hire.
Additionally, when considering bonus income, lenders will also evaluate other factors, such as your credit score, debt-to-income ratio, and savings or "reserves." These factors provide a comprehensive view of your financial situation and help determine your eligibility for the loan.
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How to prove bonus income
Yes, your bonus counts as income for loans, and can be used as an additional source of income when qualifying for a home loan. However, lenders have specific guidelines in place for borrowers seeking to use bonus income to qualify for a loan.
If your bonus income exceeds 25% of your total income, you will be considered self-employed and underwritten as such. In this case, it is advisable to consult your loan officer to determine how to document this additional income.
Lenders will typically require verification that you have received bonus income for at least two years. This bonus income should be regular and of a similar amount each time. Lenders will also want to see documentation supporting your bonus income on pay stubs, W2s, and tax returns. They will also want to know that there is a likelihood that your bonuses will continue, which can be defined on a written verification of employment from your company.
Calculating bonus income is straightforward. Lenders will take the amount of bonus income received over the past two years and divide it by 24 months to arrive at a monthly income. This monthly income can then be used to determine your eligibility for a loan.
It is important to note that not all lenders will accept bonus income as part of your income, and even when they do, there are different ways it can be counted. It is recommended to verify your loan eligibility with your chosen lender and understand their specific guidelines for bonus income.
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How likely your bonus income will continue
When it comes to loans, lenders will consider your bonus as a part of your income. However, they will require verification that you have been receiving this bonus income for at least two years. The bonus income also needs to be regular and of a similar amount. Lenders will need documentation supporting your bonus income on pay stubs, W2s, and tax returns. They will also want to know that there is a likelihood that your bonuses will continue. This likelihood is typically defined on a written verification of employment from your company. If you haven't been receiving bonus income for at least one year, it probably can't be given full value for loan approval.
Lenders will also take into account other factors, such as your credit score, debt-to-income ratio, and savings or 'reserves'. The higher your credit score, the lower your mortgage rate, and the more home you'll be able to afford. Lenders want to see that you have enough savings and liquid assets to cover mortgage payments for several months.
Some lenders will consider additional compensation in the form of company stock, known as restricted stock units (RSUs), as qualifying income. However, it can be challenging to find lenders who will accept these payments as part of your income, and even when you do, there are different ways it can be counted. For example, some lenders may use only 75% of the current share price as a conservative estimate of the value.
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Frequently asked questions
Yes, bonus income can be used as additional income when applying for a mortgage loan. However, lenders will have specific requirements that must be met for this to be the case. These requirements include:
- A history of receiving bonuses over a period of one to two years.
- Verification that the bonus income is likely to continue.
- Consistent bonus income in terms of frequency and amount.
- Documentation supporting bonus income, such as paystubs, tax returns, and letters of confirmation from your employer.
Lenders will typically take the amount of bonus income received over the past two years and divide it by 24 months to arrive at a monthly 'income'. However, it's important to note that not all lenders accept bonus income, and each lender may have different requirements.
If bonus income exceeds base employment income by more than 25%, the lender will consider the borrower self-employed. In this case, additional documentation may be required, such as income tax returns and a profit and loss statement.
