Part-time income is not often thought of as qualifying income for a mortgage. If it is not steady full-time income, most lenders don’t want to look at it. Some lenders do accept it however on a variety of loans, including VA and FHA loans. You may earn the part-time income on its own or in conjunction with a full-time income – as long as your other factors fall into place for a loan, you may be able to use this income for qualifying purposes. So how do you know if your part-time income will qualify? Here are a few simple guidelines.
Steady Income is Important
The one factor any lender wants is consistency in any factor that applies to your mortgage application. They want to see that you are a stable risk. When it comes to your income, this means that you received the income for a steady number of years. Typically, the magic number is 2 years, but every lender is different. Does this mean you have to have the same part-time income from the same company for two years? For some lenders the answer is yes, while others do not care as much which company the income comes from, just that you receive the income and there are no gaps. If you have a good reason for changing companies, such as you moved to another part of town or the company closed, then the change is not as detrimental to your mortgage file. If you know you want to apply for a mortgage, try to keep the same part-time job for a long period of time before applying. Any sudden changes, including changing jobs could make your loan profile less attractive.
Assets are Crucial
One aspect all lenders want no matter the type of loan or income is the presence of assets. Having reserves is worth its weight in gold to lenders. When you have several months’ worth of mortgage payments set aside in a savings account, lenders are more willing to work with you because you bring the level of risk down for the mortgage. What reserves show is that you know how to manage your money and that you can save money even with part-time income. It shows the lender that you do not max out your spending and live paycheck-to-paycheck, which can be too risky for a lender to take on. In general, the more months’ of reserves you have on hand, the higher your chances of getting a mortgage get.
Debt Ratios Play a Role
The key factor in getting approved for a mortgage is your debt-ratio, especially in the presence of the Qualifying Mortgage guidelines. Lenders are not allowed to provide loans to those with high debt ratios and still fall under the Qualifying Mortgage guidelines. Lenders that choose to provide loans that are not qualified are not protected from litigation from the borrowers should they default and lose their home. Because of this, many lenders are very picky about debt ratios. If your part-time income does not allow your debt ratio to fall under the maximum 43 percent set forth by the government, then many lenders will not be willing to provide you with a loan. If you are trying to use your part-time income as a compensating factor to help bring your debt ratio down in combination with your full-time income, however, you will have an easier time.
Providing Proof of Continuance
One thing most lenders look for when using part-time income for qualifying purposes is the proof that it will continue. This is when the history of your income plays a vital role. If the part-time income is fairly new, there is not a lot of guarantee it will continue unless you have something in writing from your employer. If you do not have any type of proof and a short history, it may not be used. On the other hand, if you have held this job for many years and it is in a stable industry, many lenders will allow its use in order to help bring your debt ratio down. If your employer can provide some type of proof – even a letter on their letter head stating that you will continue to receive the income for the foreseeable future, many lenders can allow the income to be used.
Try to Stabilize your Hours
One of the hardest factors surrounding part-time income is the inconsistency in the hours. If you receive a few hours one week and then many hours the next, it is hard for lenders to come up with a qualifying income. On the other hand, if you work the same amount or relatively the same amount of hours every week, your income is easier to predict for qualifying purposes. If you know you are going to apply for a loan, try to talk to your employer about simplifying your hours so that you can have an easier time qualifying for the loan.
In the end, there are many lenders willing to use part-time income for qualifying purposes. What it all comes down to is the entire picture you provide. Just part-time income on its own will not determine if you can or cannot get a loan. What matters is how many months of reserves you have on hand; what your debt ratio is at the time of application; and how likely your income is to continue. Lenders do not want to take huge risks, but with loans that are backed by the government, such as FHA and VA loans, there is a slightly higher chance that riskier loans will get approved. What this means is do not give up if you have part-time income – get out there and try to find a lender that will provide you with the funding you need with the income you provide.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.