When applying for a mortgage, lenders want to be sure that borrowers can handle monthly payments and still have enough money left to pay bills and live on. Given how regulated the mortgage industry is, the income process requires a lot of analysis.
Income comes in many different flavors. Some people earn by working, others through investments, while some may live off of gains from a large asset sale. These different income types add complexity to the mortgage application approval process.
Specifically for those generating capital gains from the sale of an asset, what are the considerations when using those proceeds as income for a mortgage?
Mortgage Application Income
When applying for a mortgage, your income and expenses are big factors in determining if your application will be approved. Income is broken into several categories, and not all income qualifies for a mortgage.
For those with a salaried or hourly income, originators will divide the annual income by 12. That creates a starting point for the monthly mortgage payment. Depending on the lender, they may use two years of income, which provides a better income history.
Note that salaried and hourly incomes are treated similarly by many originators. They are both stable, consistent forms of income.
People on an hourly income that fluctuates a lot, meaning a variable number of hours per week, can fall into a different income bucket requiring more scrutiny. In this case, income is taken over at least two years instead of one.
Also, people earning an income based on commission will need at least two years of income history.
Self-employed and 1099 earners may have the most difficult time getting qualified. This is often because it is more difficult to verify self-employed income. Such income can also be quite variable.
Capital Gains As Qualified Income
Capital gains aren’t typically used as an income source for mortgage applications since it is a one-off income. But there are some exceptions.
In the case that a borrower needs to qualify their income using capital gains, Fannie Mae provides some guidelines.
- Two years of capital gains income from signed taxed returns. This information can be found on IRS Form 1040, Schedule D.
- Average capital gains income from the last two years. This average will be used as their qualified income. The borrower must also show they have assets that can be sold if additional income is needed to meet future mortgage payments.
Note that capital losses do not need to be factored into this calculation, even if the losses are recurring.
Lenders can vary greatly. Some may be more willing to work with self-employment and capital gains income than others. All will want verification, which means keeping good records (i.e., check stubs and sales receipts). But if the situation qualifies, capital gains can certainly be used as income for a mortgage.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Hypothetical examples shown are for illustrative purposes only.