Can You Use Per Diem Income to Qualify for a Mortgage?

Understanding Per Diem Income for Mortgages

Per diem income, commonly found in professions like healthcare, construction, and consulting, represents a daily allowance intended to cover job-related expenses. This can include costs such as meals, lodging, or travel while working away from one’s primary residence.

Unlike traditional wages or salaries, per diem payments are often structured as reimbursements rather than direct compensation. This fundamental difference means that lenders approach per diem income with particular caution when evaluating mortgage applications.

Because per diem is typically a reimbursement for expenses, it is often non-taxable. This non-taxable status means it generally does not appear as part of an individual’s gross income on tax returns. The variability inherent in per diem income also presents a challenge; the amount received can fluctuate based on travel requirements, assignment duration, or project availability. Lenders perceive this variability as a potential risk, as it may not offer the consistent, predictable income stream preferred for mortgage qualification.

Mortgage lenders prioritize stable and predictable income sources to ensure a borrower’s ability to consistently make monthly payments. Its nature as a reimbursement for expenses means it is generally not considered qualifying income. Therefore, the core challenge for borrowers relying on per diem is demonstrating that these payments represent a reliable and continuing financial capacity beyond mere expense coverage.

Lender Requirements for Per Diem Income

Lenders apply specific criteria when considering per diem income for mortgage qualification. Generally, per diem payments that are explicitly reimbursements for travel, lodging, meals, or work-related supplies are not counted as qualifying income, as these funds are provided to offset specific expenses rather than serving as discretionary wages. However, if the per diem or stipend income is taxable and clearly demonstrated to be regular and ongoing, it may be considered under specific conditions.

For per diem income to be factored into a mortgage application, most lenders require a significant history of its receipt, typically a minimum of two years. This two-year history provides evidence of consistency, allowing lenders to assess the average amount of per diem received over time. The income must be stable, predictable, and likely to continue for at least three more years from the mortgage application date.

When a portion of per diem is recognized as non-taxable income for discretionary use, lenders may apply a “gross-up” calculation. Increasing the non-taxable amount, typically by 15% to 25%, to estimate its equivalent pre-tax value. For instance, if a non-taxable per diem allowance of $1,000 per month is grossed up by 25%, it would be treated as $1,250 for income qualification purposes. This adjustment helps to level the playing field, as taxable income is naturally evaluated on a gross basis.

This gross-up is most commonly applied to other forms of non-taxable income, such as certain Social Security benefits or military allowances. The ability to gross up per diem payments depends on the lender’s interpretation and whether the payments can be definitively categorized as a consistent, discretionary allowance. Borrowers must be prepared to provide clear documentation to support the nature and continuity of their per diem earnings. Without strong evidence that the per diem is a stable, continuing, and discretionary component of income, it is unlikely to be included in qualification calculations.

Documentation and Application Steps

Applicants relying on per diem income for mortgage qualification must meticulously gather specific documentation to substantiate their financial standing. The most crucial items include itemized pay stubs that clearly delineate per diem amounts from base wages. Lenders typically request pay stubs covering the most recent two to three months. These documents provide a detailed breakdown of all earnings.

In addition to pay stubs, borrowers will need to provide W-2 forms and federal income tax returns for the past two years. Although per diem income is often non-taxable and may not appear on W-2s as gross wages, tax returns still serve to verify employment history and overall income consistency. An employer verification letter is also beneficial, explicitly stating the nature, frequency, and the likelihood of the per diem income continuing for at least the next three years. This letter should confirm that the per diem is a regular component of the compensation structure.

Bank statements for the past two to three months are also essential, demonstrating consistent deposits of income and showcasing financial stability. For self-employed individuals receiving per diem, business records and profit and loss statements may be required. Presenting these documents in an organized and clear manner to a mortgage lender experienced with non-traditional income sources can streamline the application process. It is advisable to proactively discuss the role of per diem income early in conversations with potential lenders.

Overall Mortgage Qualification Factors

While income, including per diem, is a significant component of mortgage qualification, several other factors influence a lender’s decision. A borrower’s credit score is an indicator of their financial responsibility and repayment likelihood. Most conventional mortgages require a minimum credit score around 620, though higher scores lead to more favorable loan terms and interest rates. Government-backed loans, such as those from the Federal Housing Administration (FHA), may offer lower minimum credit score requirements.

The debt-to-income (DTI) ratio compares a borrower’s total monthly debt payments to their gross monthly income. Lenders use DTI to assess how much of an applicant’s income is already committed to existing debts, including credit cards, auto loans, and student loans. While a DTI ratio of 36% or less is often preferred, some lenders may approve loans with a DTI up to 43% or even 50% for certain loan types. A lower DTI indicates a greater capacity to manage additional mortgage payments.

The amount of the down payment also plays a substantial role, as it represents the borrower’s upfront investment in the home. Conventional loans may require a down payment of at least 3% to 5%, with 20% often allowing borrowers to avoid private mortgage insurance (PMI). A larger down payment can reduce the loan-to-value (LTV) ratio, potentially leading to lower interest rates and increasing the likelihood of loan approval. Employment stability, demonstrated by a consistent work history, reassures lenders of a borrower’s long-term financial capacity.