What Counts as Income for a Mortgage?

You've found your dream home. Now you need to take out a mortgage loan to buy it. Your mortgage lender will take a close look at your income to make sure you can afford the monthly payments that will come with your new home and mortgage loan. But what exactly does your lender consider income? Depending on your financial situation, your income might not be limited to the pay you receive from your employer.

Mortgage lenders want to lend home-loan dollars to those borrowers most likely to pay back their debts. Borrowers with a steady stream of monthly income fit into this category. Most lenders want to work with borrowers whose estimated monthly mortgage payments would total no more than 28 percent of their gross monthly income. Lenders also prefer that borrowers' total monthly debts -- including everything from student-loan payments to mortgage-loan payments to minimum credit-card payments -- equal no more than 36 percent of their gross monthly income.

Lenders will consider any regular source of income that they can document with a paper trail when determining whether you can afford a particular mortgage amount. This includes, of course, your income from your place of employment. It can also include freelance payments if you work as an independent contractor and regular rental income if you own rental properties. Lenders will also consider as income regular payments you receive from legal settlements -- including court-ordered alimony or child-support payments. You can also use income from retirement benefits, disability payments and investment returns.

Depending on the lender, a few additional income sources may be acceptable if they can be proven. These include capital gains income, foster care income, interest and dividend income, tip income, trust income and notes receivable.

If you are applying for a joint mortgage -- with at least one other person, such as a spouse, friend or family member -- lenders will consider the income sources of everyone who is applying for the loan. This can help you qualify for a larger mortgage. If your gross monthly income is $3,500 and your spouse's gross monthly income is $3,000, lenders will consider your combined gross monthly income to be $6,500.

You will have to prove your gross monthly income to lenders. It's easy to prove some income. You can usually provide your lender with copies of your two most recent pay stubs to document the salary you receive each month from your employer. You can also provide recent copies of rental checks to verify any monthly rental income you receive.

Other forms of income can be more difficult to prove. If you work as an independent contractor on a freelance basis, you'll have to provide most lenders with your last two to three years of income tax returns. Lenders can then study these returns to make sure that your freelance income has remained steady during this period of time.