Key Takeaways
- Household income includes wages, bonuses, and other income sources.
- Lenders use household income to determine your borrowing power.
- Debt-to-Income ratio should typically be below 43% for approval.
- Conventional loans have no income limits but require DTI compliance.
Article Summary
Household income includes all income sources for everyone who will be on the mortgage loan. This typically includes:
Household income is the total income from all sources for everyone living in your home who will be on the mortgage. This figure is crucial for mortgage lenders when determining your borrowing power and loan eligibility.
What is Household Income?
Household income includes all income sources for everyone who will be on the mortgage loan. This typically includes:
- Primary income: Wages, salary, commissions, bonuses
- Secondary income: Part-time work, freelance income, side hustles
- Investment income: Dividends, interest, capital gains
- Other income: Social Security, disability, alimony, child support
How Lenders Calculate Household Income
Lenders use several methods to calculate your household income:
- Gross monthly income: Total income before taxes and deductions
- Stable income: Income that's likely to continue
- Verifiable income: Income that can be documented
- Qualifying income: Income that meets lender requirements
Impact on Mortgage Approval
Debt-to-Income Ratio (DTI)
Your household income directly affects your DTI ratio, which is crucial for mortgage approval:
- Front-end DTI: Housing costs divided by gross monthly income
- Back-end DTI: Total debt payments divided by gross monthly income
- Maximum DTI: Most lenders prefer DTI below 43%
Income Requirements by Loan Type
Different mortgage programs have varying income requirements:
- Conventional loans: No income limits, but must meet DTI requirements
- FHA loans: No income limits, but must meet DTI requirements
- VA loans: No income limits, but must meet DTI requirements
- USDA loans: Income limits based on area median income
- HomeReady: Income limits at 80% of area median income
Qualifying Income Sources
Acceptable Income Types
- Employment income: W-2 wages, salary, commissions
- Self-employment: Business income, freelance earnings
- Investment income: Dividends, interest, rental income
- Government benefits: Social Security, disability, VA benefits
- Other income: Alimony, child support, boarder income
Income Documentation Required
Lenders typically require:
- Pay stubs: Last 30 days of pay stubs
- W-2 forms: Last 2 years of W-2 statements
- Tax returns: Last 2 years of personal and business tax returns
- Bank statements: Last 2-3 months of bank statements
- Additional documentation: For non-traditional income sources
Income Challenges and Solutions
Common Income Issues
- Gap in employment: Lenders prefer 2 years of continuous employment
- Recent job change: May need to wait for probation period to end
- Seasonal income: Lenders may average income over 2 years
- Commission-based income: Usually averaged over 2 years
Solutions for Income Challenges
- Co-borrower: Add someone with stable income to the loan
- Non-occupant co-borrower: Add someone who won't live in the home
- Larger down payment: Reduce loan amount and monthly payment
- Wait and build: Improve income stability before applying
Understanding household income requirements helps determine your eligibility for various loan types. Understanding household income is crucial for jumbo loan qualification.
For a complete overview of mortgage qualification, see our Mortgage 101 guide. For answers to common questions, see our first-time home buyer FAQ.
