Does Overtime Count as Income for a Mortgage?

Overtime pay can be a valuable component of an individual’s total income. Overtime income can be counted as qualifying income for a mortgage, but it is not automatically included like a regular base salary. Lenders apply specific criteria to determine its eligibility, primarily focusing on its stability and consistency.

Lender Requirements for Overtime Income

Lenders prioritize a consistent history of overtime earnings when evaluating mortgage applications. This consistency demonstrates the reliability of the income stream, giving lenders confidence in an applicant’s ability to meet future mortgage obligations.

To establish a pattern of sustained overtime, lenders typically require a historical duration of one to two years. Many conventional and government-backed loan programs, such as FHA loans, generally look for a two-year history of receiving overtime pay. Some guidelines permit exceptions for periods shorter than two years, provided the overtime has been consistently earned for at least one year and is likely to continue.

Lenders assess the likelihood that overtime earnings will continue into the future. This involves evaluating the employer’s history of offering overtime, the applicant’s specific role within the company, and the general stability of the industry. Lenders seek confirmation from the employer, often through a Verification of Employment, that the overtime is expected to continue for a foreseeable period, often three years.

The way lenders view overtime can vary depending on employment type. For salaried employees, demonstrating stability might be straightforward. For hourly employees, lenders often average their income over a set period to account for variations, ensuring only a stable portion is considered.

Documenting Overtime Income for Application

Mortgage applicants need to provide specific documents to verify their overtime income. Recent pay stubs are a primary source, typically required for the most recent 30 to 60 days. These documents detail current and year-to-date earnings, including regular wages and overtime pay.

W-2 forms from previous years are essential for confirming total annual income, including all overtime earnings. Lenders commonly request W-2s for the past two years to verify the historical income pattern.

A Verification of Employment (VOE) is another crucial document, where lenders directly contact the applicant’s employer. The VOE confirms employment status, base pay, and provides details on historical and expected future overtime earnings. Employers are often asked to specify if the overtime is likely to continue, which is a key consideration for lenders. This process typically involves both a written request and a verbal confirmation, with the verbal verification often occurring close to the loan closing.

Bank statements may occasionally be requested to offer additional proof of consistent income deposits. However, they are generally not used to differentiate between base pay and overtime in the same detailed manner as payroll records.

Calculating Eligible Overtime Income

After all necessary documentation has been gathered and verified, lenders proceed with calculating the portion of overtime income that will be counted towards an applicant’s qualifying income. The most common calculation method involves averaging overtime earnings over the most recent 12 or 24 months.

The impact of declining overtime earnings is a significant consideration. If an applicant’s overtime has decreased over the look-back period, lenders will generally use the lower, more recent income figure. Some guidelines, such as those for FHA loans, specify that if current year overtime decreases by 20 percent or more from the previous year, the lower current year’s income must be used. In cases of substantial or seemingly permanent declines, lenders may even discount or entirely exclude the overtime income.

In scenarios where an applicant has less than the standard two years of overtime history, some lenders may still consider it. A minimum of 12 months of consistent overtime earnings is often required. This shorter history may be accepted, particularly if the income is stable and expected to continue, or if the applicant possesses strong compensating factors like a low debt-to-income ratio or a high credit score.

The final calculation of eligible overtime income is derived from the verified data provided through documentation. This includes detailed information from pay stubs, the total earnings reported on W-2 forms, and the confirmations received from the employer through the Verification of Employment process. The accuracy and consistency of these submitted documents are paramount to the successful inclusion of overtime income.