Other Income Mortgage Guidelines With Less Than 2 Years Seasoning

Let’s delve into the intricacies of other income mortgage guidelines, particularly when seasoning falls short of the customary two-year mark. In mortgage applications, understanding the nuances of other income sources can significantly impact the borrowing process. Often, individuals rely on various income streams beyond traditional employment wages to bolster their financial standing. However, navigating mortgage guidelines can become more complex when these income sources have less than two years of seasoning – a term denoting the duration of consistent income. 

Most lenders want to see 2 years of the same employment history from mortgage applicants. There are two types of lending requirements:

1. Agency Mortgage Guidelines
2. Mortgage Overlays by each individual lenders

All lenders need to meet agency guidelines on government and conventional loans.

• • However, most lenders have a second tier of lending requirements called lender overlays
  • Gustan Cho Associates Mortgage Group are national direct lenders with no overlays on FHA, VA, USDA, and Conventional Loans
  • We just go off Agency Mortgage Guidelines and do not care about any other lending requirements
  • Over 75% of our borrowers are folks who could not qualify at other lenders due to their lender overlays

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Mortgage Agency Guidelines Versus Lender Overlays

Gustan Cho Associates has no lender overlays on government and conventional loans.

• Overlays are additional lending requirements above and beyond those of Agency Guidelines
• For example, most lenders require a 620 to 640 credit score on FHA Loans when the minimum credit score requirements by HUD for 3.5% down payment FHA Loan is 580
• Same with debt to income ratios
• Most mortgage companies require a 43% to 50% debt to income ratio on FHA Loans when the maximum cap required by HUD to get an approve/eligible per AUS is 56.9%
• The lower DTI cap is called overlays by mortgage companies
• Again, Gustan Cho Associates has no overlays on FHA, VA, USDA, and Conventional Mortgages
• Most lenders do have overlays on part-time and overtime income where they require any other income with less than two years cannot count

Income Mortgage Guidelines On Other Income

Again, income mortgage guidelines with less than two years seasoning can count as qualified income at Gustan Cho Associates Mortgage Group and we will explain how and why.

Other income per income mortgage guidelines on all government and conventional loans programs are defined as the following:

• Part Time Income
• Overtime Income
• Bonus Income
• Royalty Income
• Commission Income

Most lenders will not allow other income to count as qualified income if the other income has not been seasoned for two years and the likelihood to continue for the next three years. Gustan Cho Associates Mortgage Group will allow other income as long as the borrower had it for at least the past 12 months and the other income looks promising that it will continue on for the next three years.

What Constitutes Other Income?

Other income encompasses any revenue streams beyond regular employment wages or salary. These may include rental income from investment properties, bonuses, overtime pay, alimony, child support, investment dividends, and more. While these sources can enhance a borrower’s financial profile, their acceptance and treatment in mortgage applications hinge on stability, consistency, and documentation.

The Significance of Seasoning

Seasoning is a crucial metric for lenders evaluating the reliability and sustainability of income sources. A two-year history provides a solid basis for assessing an income stream’s stability, reducing the risk of borrowers overstating their financial standing or relying on transient revenue sources. However, lenders may exercise greater scrutiny to ensure prudent lending practices when dealing with income streams with less than two years of seasoning.

How Is Other Income Calculated By Underwriters?

Again, the topic I am covering today is Agency Income Mortgage Guidelines.

• Not all lenders need to abide by these mortgage guidelines
• Every lender can have overlays on all of their loan programs
• All mortgage companies need to meet agency guidelines
• However, they can have that second tier of lending requirements called overlays
• And this includes how they want to treat other income
• Lenders are not obligated to use any other income if it has not been seasoned for 24 months
• However, Gustan Cho Associates and a few select other national lenders with zero overlays on government and conventional loans can allow borrowers with less than 24 months other income as qualified income

How Mortgage Underwriters View Other Income

Here is how it works:

• Other income is overtime, bonus, commission income can be used as qualified income with less than 24 months seasoning
• Need to have a minimum of 12 months of consistent other income
• The outlook of continuation for the next three years needs to be positive and promising
• If a borrower has 14 months of part-time and/or overtime income year up to date, here is how it is calculated:
  • take 14 months of other income and divide it by 24 months
  • The resulting figure will be the monthly income
  • If a borrower had part-time and/or other income for 18 months, then 18 months will be divided by 24 months to yield the monthly gross qualified income that can be used

Qualifying For Mortgage With Employment Gaps In Past Two Years

Borrowers can have gaps in employment in the past 24 months and qualify for a mortgage.

Here are the rules on employment gaps:

• If the borrower had gap of employment for six months or less, there is no seasoning period on a new job
• The borrower had six or more months in the employment gap, then there is a six-month seasoning on a new job to qualify for a mortgage
• Two years of employment history is required prior to the employment gap
• Borrowers who go from 1099 to W2 wage earner, there is no waiting period to qualify for a mortgage and we will just use the new full-time income on the offer employment letter
• If borrower go from W2 wage earner to 1099 wage earner, there is a two year seasoning wait period because two years 1099 income is required
• Being employed in the same field does not matter

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Challenges and Considerations

Documentation Requirements:

Documentation demands may vary depending on the lender and the nature of the additional income. Borrowers should be prepared to furnish comprehensive documentation, including recent bank statements, tax returns, rental agreements, and other pertinent financial records to substantiate the income source.

Lender Criteria:

Each lender maintains its guidelines and criteria for accepting other income with less than two years of seasoning. While some lenders may be more flexible in their approach, others may impose stricter requirements, necessitating higher financial stability and reliability.

Mitigating Factors:

Borrowers can proactively strengthen their mortgage application despite the seasoning constraints. This may involve demonstrating the consistent performance of the income source over its limited history, maintaining a healthy credit profile, and providing additional collateral or reserves to mitigate lender risk.

Expert Guidance and Advice

Considering the intricacies, seeking legal advice from mortgage brokers, financial advisors, or real estate professionals is strongly recommended. These professionals can offer tailored insights and strategies to navigate the mortgage landscape effectively, particularly when dealing with non-traditional income sources and less than two years of seasoning.

Frequently Asked Questions (FAQs)

1. What is Other Income in Mortgage Applications?
   Other income refers to any source outside of regular employment wages or salary. It can include bonuses, overtime pay, alimony, child support, investment dividends, rental income, etc.
2. What is Seasoning in Mortgage Terms?
   Seasoning refers to the length of time a particular financial activity or event has been occurring. In the context of mortgage guidelines, it typically refers to the duration for which a particular income source has been stable or consistent.
3. Why is Seasoning Important in Mortgage Applications?
   Lenders often require seasoning to ensure the stability and reliability of income sources. It helps mitigate the risk of borrowers overstating their income or relying on temporary sources that may not be needed to be more able.
4. Can Other Income Sources with Less Than 2 Years of Seasoning be Considered for a Mortgage?
   Some lenders may consider other income sources with less than two years of seasoning. Still, it depends on various factors, including the type of income, its consistency, documentation, and the lender’s specific guidelines.
5. What Other Income Sources are Typically Accepted with Less Than 2 Years Seasoning?
   Some categories of earnings, like income generated from renting out properties from real estate properties, may be accepted with less than two years of seasoning if the borrower can provide sufficient documentation to demonstrate its reliability and sustainability.
6. What Documentation is Required for Other Income with Less Than 2 Years Seasoning?
   The documentation needed can differ based on both the lender and the nature of additional income. Generally, borrowers may need to provide recent bank statements, tax returns, rental agreements, and other relevant documents to verify the income source.
7. Are there Any Restrictions on Using Other Income with Less Than 2 Years of Seasoning for Mortgage Qualification?
   Lenders may impose certain restrictions or additional requirements for borrowers relying on other income with less than two years of seasoning. These could include higher down payment requirements, higher credit score requirements, or lower debt-to-income ratio limits.
8. How Can Borrowers Strengthen Their Mortgage Application with Other Income Less Than 2 Years Seasoning?
   Borrowers can strengthen their application by providing thorough documentation of the other income source, demonstrating its stability and reliability. They can also work with a mortgage broker dealing with borrowers with non-traditional income sources.
9. What Happens if Other Income with Less Than 2 Years Seasoning is Not Accepted?
   Suppose one lender does not accept other income with less than two years of seasoning. In that case, borrowers may explore other lending options, work on building a stronger financial profile, or consider waiting until the income source meets the seasoning requirement before applying for a mortgage.
10. Should Borrowers Seek Professional Advice When Applying for a Mortgage with Other Income Less Than 2 Years Seasoning?
    Yes, borrowers should seek professional advice from mortgage brokers, financial advisors, or real estate professionals who can provide guidance tailored to their financial situation and goals.

Navigating other income mortgage guidelines with less than two years of seasoning requires careful attention to detail and proactive planning. While seasoning is a benchmark for assessing income stability, borrowers with newer income sources can still secure mortgage financing by providing thorough documentation, understanding lender criteria, and seeking professional guidance. By embracing these strategies, borrowers can enhance their prospects of obtaining mortgage approval and achieving their homeownership goals.

Please contact us at Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response with any questions. Or email us at alex@gustancho.com. Our licensed and support personnel are available 7 days a week, evenings, weekends, and holidays.