Understanding Mortgage Overtime: Does It Count?

When it comes to applying for a mortgage, income is a crucial factor in determining eligibility. However, it can be tricky to determine whether overtime pay can be included as part of your total income. Overtime income can be considered in mortgage applications, but specific criteria and requirements must be met. These criteria vary depending on the type of mortgage, the lender, and the borrower's employment status. Some lenders may require a two-year history of overtime income, while others may accept a shorter period if the borrower's employment profile demonstrates positive factors. Additionally, certain professions, such as essential and emergency service workers, may have favourable policies regarding the inclusion of overtime income. Ultimately, the stability and consistency of overtime income play a significant role in its consideration for mortgage applications.

Lender criteria for overtime pay

Documentation and Income History:

Lenders typically require a minimum of one to two years of documented overtime income history. This includes providing tax returns, W-2s, and pay stubs to verify your total annual income and current monthly gross income, including overtime earnings. Some lenders, such as Fannie Mae, Freddie Mac, and FHA, recommend a two-year minimum of employment income history. However, income received for a shorter period may be considered acceptable if positive factors offset the shorter history.

Stability and Continuity:

Lenders want to see that your overtime income is stable, reliable, and likely to continue. They may request a letter or confirmation from your employer stating that your overtime earnings are expected to remain consistent or increase in the future. If you have recently changed jobs, lenders will need to verify that your new position will also provide overtime opportunities.

Calculation of Overtime Income:

Lenders will request verification of employment, including a breakdown of your pay history, overtime hours, and earnings. They will use your current hourly pay rate and the number of overtime hours worked to calculate your monthly and annual overtime income. This income will then be included in your debt-to-income ratio, affecting the mortgage amount you can afford.

Lender-Specific Guidelines:

Mortgage qualification requirements, including the use of overtime income, can vary by lender and loan program. VA lenders, for example, have specific criteria for considering overtime pay as effective income. It is important to consult with multiple lenders to understand their specific guidelines and determine the loan you can afford based on your total income, including overtime.

Employment history

When it comes to qualifying for a mortgage, your employment history is a crucial factor. Lenders typically require a two-year employment history, including any bonus, commission, or overtime income. However, this doesn't always have to be continuous, and there can be gaps of up to six months, as long as the applicant has been back to work for at least two full months and can provide pay stubs. Additionally, military service and formal education, such as college or vocational school, are usually considered part of your employment history.

For those with irregular working patterns, lenders may calculate an average overtime income based on work history. For example, an employee who works 84 hours one week and is off the next week would average 42 hours per week or 2 hours of overtime each week. In this case, the borrower may be able to use this overtime income to qualify for a mortgage with only one year's worth of documentation.

If you've had multiple employers over the past two years but have consistently worked overtime at each job, your lender may consider this when evaluating your income. They will calculate the size of this income when determining your loan eligibility. Lenders will request verification of employment from your employer, which can include a breakdown of your pay history, including overtime hours and earnings.

Additionally, if you've recently changed jobs, lenders must verify that your overtime income is expected to continue at your new place of employment. This can be done through a letter from your employer stating that your overtime earnings are anticipated to remain stable.

While a two-year employment history is standard, there are exceptions for borrowers with stable jobs, consistent earnings, and strong employment, financial, and credit profiles. Some lenders may accept a shorter employment history of one to two years if the borrower has a steady job and income or other positive factors.

It's important to note that the requirements may vary depending on the type of mortgage and the lender, so it's recommended to contact multiple lenders to understand their specific guidelines and find the best option for your situation.

Consistency of overtime pay

The consistency of overtime pay is a crucial factor in determining whether it will be considered for a mortgage application. Lenders typically require evidence of consistent overtime income over a period of time to ensure the stability and reliability of this additional income.

FHA (Federal Housing Administration) guidelines state that overtime income must be received for at least two years to be considered effective income. However, exceptions can be made for overtime pay received for less than two years if it has been consistently earned for at least one year and is likely to continue.

Similarly, VA (Veterans Affairs) lenders often require a two-year track record of overtime income to count it towards qualifying for a VA home loan. They may also consider overtime pay as effective income if it meets their specific criteria and is stable, reliable, and likely to continue.

Some lenders may consider a shorter history of overtime income, such as a minimum of one year, to assess the borrower's ability to repay the loan. In certain cases, lenders may accept a three-month history of receiving overtime income or even consider each case individually to determine the stability of overtime hours.

It is important to note that the requirements for considering overtime pay in mortgage applications vary among lenders. Some lenders may use 100% of overtime income if it is consistent, while others may have different criteria for assessing non-base income and allowances.

To increase the chances of overtime income being considered, borrowers should provide sufficient documentation, such as employment letters, recent payslips, and group certificates, to verify the stability and continuance of their overtime earnings.

Documentation of income

When it comes to applying for a mortgage, income plays a crucial role in determining your eligibility. Lenders will want to see proof of income to confirm that you make enough money to repay the loan. This is usually done by providing tax returns, bank statements, and documents that show your income, such as W-2s, pay stubs, and direct deposits.

If you are relying on overtime pay to qualify for a mortgage, you must meet certain requirements. Lenders will have specific criteria for considering overtime pay, and it is important to provide sufficient documentation of this income. Overtime pay can be counted as effective income if you have received it for a minimum of the past two years and it is reasonably likely to continue. However, some lenders may consider overtime pay that has been consistently earned for a period of at least one year.

For a VA home loan, the lender must verify that your overtime income is stable, reliable, and likely to continue. They will request a verification of employment from your employer, including a breakdown of your pay history and overtime hours and earnings.

It is important to note that the documentation requirements may vary depending on your source of income and the lender's specific criteria. Self-employed individuals, for example, may need to provide additional documentation, such as business activity records, bank statements, and tax returns.

In addition to income documentation, lenders may also request other financial information, such as investment assets, insurance policies, and bank statements, to assess your risk profile and ensure that you can make your payments on time. They may also pull your credit reports with your permission to determine the type of mortgage loan you may qualify for.

Essential service workers

However, it is important to note that lending criteria can vary from lender to lender. Some lenders may require a two-year history of overtime income, while others may be more flexible, especially if overtime is a condition of employment. For example, some lenders will use 100% of your overtime income if you have been in your job for three months or more. To maximise your chances of approval, it is recommended to work with a mortgage broker or professional who has experience with non-traditional income sources and can guide you in presenting your application in the best light.

To document your overtime income, you will typically need to provide payslips, tax returns, and a letter from your employer confirming your overtime income. Some lenders may also request a group certificate or other documents to verify your income. The more evidence you can provide, the better, as it aids the assessment of your overtime income. Lenders will often use the lowest income proven by the documents provided.

It is also worth noting that lenders will want to see that your overtime income is regular, consistent, and likely to continue. If your overtime income has declined in the most recent 12 months, it may be disregarded or averaged over a longer period. Additionally, if your year-to-date overtime pay does not match your average, a letter of explanation may be necessary.

Frequently asked questions