Income Continuance and Mortgage Qualification
Lenders need to know how much money you make, but they also want to know how long your income will last, which is sometimes referred to as income stability or income continuance.
Sounds simple, but it can become surprisingly complicated, as some incomes are not guaranteed to continue. If you have an unstable, inconsistent, or non-continuing income, you can still get the loan you need, but the lender may require a few extra steps.
Income Continuance: An Under-Appreciated Aspect of Mortgage Approval
Determining the Stability of Your Income
For Fannie Mae, Freddie Mac, as well as other organizations involved in the mortgage-lending industry, determining the stability of your income is crucial. In this case, the concept of “continuance” comes into play. Continuance essentially refers to how long your income can be expected to continue.
This might seem like a no-brainer: if you have a job and earn a certain amount per year, then by all measures you can reasonably expect your income to continue as long as you have that job. For most people, income stability is not an issue.
But what if you are self-employed and earn an uneven income? What if a significant portion of your income comes from alimony which may end in five years? What if you earn a lot of overtime pay, which may not continue into the upcoming months? In these cases, your income is not as stable as others, and the lender may need to take special steps in order to reach mortgage approval.
Incomes and earnings that do not have documentable continuance are widespread. They can include overtime pay, which you are not guaranteed to have next week or next month, as well as bonuses which can be just as unpredictable. Auto allowances, which seem stable but tend to change, also have difficulty with proving continuance. The big one, however, it self-employment income. The continuance and stability of this type of income can be almost impossible to prove, but if you have a sustained history of successful earnings, you should be able to qualify for a loan that fits your needs.
The Rules of Income Stability
When a lender works to get you approved, they generally will go through numerous steps and verify a few important pieces of information. The lender will need to know how long you have earned your income, but they will also want to know how long you will earn the income . In almost all situations, understanding how long someone has earned the income is the easy part; you should have pay stubs and tax information to prove this information.
But demonstrating how long you will earn the income is a bit more tricky.
Fortunately, there is a set guideline, at least for loans backed by Freddie Mac, that allow you and the lender to work through the issue and increase your chances of approval.
How Freddie Mac Approaches the Issue
To qualify for a mortgage supported by Freddie Mac, the income will need to continue for at least three years. This means that if your child-support payments, for example, will end in two years, you will not be able to use this source of money towards your mortgage-loan qualification; you will have to qualify with the rest of your income. Many sources of income have an official ending period. Child support is obvious, but alimony can also end, and some borrowers may be receiving royalty money that could end at a certain time.
How Freddie Mac Approaches Continuing Income
If you have an income with a documentable continuance, you will have a simpler path to getting mortgage-loan approval. The loan underwriter, in many cases, has to be a versatile professional with a broad range of financial knowledge, and their understanding of many different financial vehicles will help you get approved for the loan you need, no matter what your exact situation.
For example, the lender will need to understand income types that may or may not have documentable continuance. This list can actually be longer than you might think, as items like longterm or short-term disability payments could have a stopping point. Longterm disability lasts much longer, so it’s more likely that you can use it for mortgage approval. However, if the disability payments have been coming for a long time, the end of these payments could be in sight, which means they may not be usable for loan approval.
Short-term disability has the same issues, and is more likely to be ineligible for qualification purposes. Supplemental Social Security income could also have an upcoming end date, and many public assistance programs will likely have a stopping point, meaning they do not have documentable continuance.
Other incomes may have multiple income sources, and each of these may have specific requirements in regards to showing the continuance. In this case, the lender may need you to provide documentation on all of these sources in order to demonstrate the continuance (or lack thereof) of each income source.
Each one will have a different process. For example, if the income source is a retirement benefit from Social Security, there will be no additional requirements for showing continuance. However, if the source is an annuity that comes from an insurance company, there will usually be a defined term and the continuance will need to be documented.
Tips for Getting a Mortgage with an Irregular Income
If you have an irregular income, qualifying for a mortgage can be exceedingly difficult. However, there are ways for you to demonstrate that your income is likely to continue, giving greater assurance to lenders. First of all, you need to make sure to bring as much documentation as possible. If you have business write-offs, you can use these to improve your debt-to-income ratio, and if you keep a solid credit profile, you will be a stronger borrower, opening many opportunities.
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