Buying a home is a big step, and it can feel even more challenging if your income isn’t steady. But don’t worry—it’s possible to Buy a Home with a Variable Income. In this guide, we’ll walk you through the steps and tips to make it happen.
Understanding Variable Income and Mortgage Qualification
First, let’s define what variable income is. Variable income means your earnings change from month to month. This could be because you’re self-employed, work on commission, or have a job in the gig economy, like driving for Uber or selling on Etsy.
Lenders, who are the people or banks that give you a mortgage, prefer borrowers with steady income because it’s easier to predict if they can pay back the loan. But that doesn’t mean you can’t get a mortgage with variable income. It just means you might need to do a bit more work to show that you’re a reliable borrower.
Steps to Buy a Home with Variable Income
Here are the key steps you need to take:
1. Document Your Income
Since your income isn’t steady, lenders will want to see proof that you can afford the mortgage payments. The best way to do this is by providing your tax returns for the last two years. They’ll look at your net income, which is your income after taxes and deductions.
You should also calculate your base income. To do this, take your total net income from the last two years and divide it by 24. This gives lenders an idea of your average monthly income.
If your income has dips, like during slower seasons, be ready to explain why. Lenders want to see that these dips are normal and not a sign of financial trouble.
2. Improve Your Credit Score
Your credit score is a number that shows how good you are at managing debt. A higher score makes it easier to get a mortgage and can get you better interest rates.
Aim for a credit score of at least 650-700. If your score is lower, work on improving it by paying bills on time, reducing debt, and checking your credit report for errors.
3. Secure a Down Payment
A down payment is the money you pay upfront when buying a home. The more you can put down, the better, because it shows lenders that you’re committed to the purchase.
If you have variable income, saving for a down payment might be challenging, but it’s important. You could consider rent-to-own options, where part of your rent goes towards buying the home, or look into down payment assistance programs.
4. Prepare Necessary Paperwork
When applying for a mortgage, you’ll need to provide a lot of documents. For variable income, this includes:
- Two years of tax returns
- 1099 forms if you’re self-employed
- Bank statements
- Proof of other income sources, like investments or rentals
- Form 4506-T, which allows the lender to verify your tax returns with the IRS
Make sure all your documents are organized and up-to-date.
Types of Income That Can Be Used for Mortgage Qualification
Lenders can consider various types of income when deciding if you can afford a mortgage. These include:
| Income Type | Description | Documentation Needed |
|---|---|---|
| Employee Wages | Regular paychecks from a job | W-2s, pay stubs, tax returns, employer verification |
| Bonuses, Overtime, Commissions | Extra earnings that are consistent | Pay stubs, W-2s, tax returns, written verification from employer |
| Self-Employment Income | Profits from your business | Tax returns, bank statements, profit and loss statement certified by accountant |
| Investment Income | Dividends from stocks or interest from savings | Account statements, tax returns documenting income |
| Disability Benefits | Payments from disability insurance or Social Security | Benefits statement, Social Security award letter, disability insurance policy |
| Social Security Income | Retirement or supplemental payments | Social Security award letter, bank statements, tax returns |
| Child Support and Alimony | Court-ordered payments | Divorce decree, child support order, proof of payments |
| Rental Property Income | Money from tenants if you own rental properties | Proof of rent payments, tenant history, tax returns |
Each type of income has its own documentation requirements, so make sure you have the necessary papers.
Tips for Strengthening Your Mortgage Application with Variable Income
To make your application stronger, consider these tips:
- Keep consistent records: Track all your income and expenses carefully to show a clear financial picture.
- Reduce debt: Lowering your debt-to-income ratio, ideally below 43%, can make you look more attractive to lenders.
- Consider a co-signer: If possible, having someone with steady income co-sign the mortgage can help.
- Look into special programs: Some lenders offer mortgages specifically for self-employed people or those with variable income, such as FHA loans or programs for gig workers.
Common Questions About Buy a Home with a Variable Income
Here are answers to questions you might have:
- What types of income can I use to qualify for a mortgage?
You can use wages, self-employment income, commissions, investment income, disability benefits, Social Security, child support, alimony, and rental income, as long as you provide proper documentation. - How do lenders view variable income?
Lenders see variable income as riskier but will approve you if you show consistent earnings over at least two years and can afford payments. - What documents do I need?
You’ll need two years of tax returns, 1099 forms, bank statements, Form 4506-T, and proof of other income sources. - How can I improve my chances?
Improve your credit score, reduce debt, save for a larger down payment, and work with a lender experienced with variable income. - Are there special mortgage programs?
Yes, programs like FHA loans or those for self-employed borrowers can help. Check with lenders or government programs like HUD for options.
Conclusion
Buy a home with variable income is challenging but definitely possible. By documenting your income thoroughly, improving your credit score, saving for a down payment, and preparing all the necessary paperwork, you can increase your chances of getting approved for a mortgage. Lenders want to see that you can afford the payments, so show them your financial stability through your records and history.
If you’re ready to take the next step, start by talking to a mortgage lender who understands variable income. They can guide you through the process and help you find the best options for your situation.