$100K Income Doesn’t Always Mean $100K in Qualifying Income
You make $100,000 a year. So when it’s time to buy a home, a mortgage lender will use that full $100,000 to determine how much you can qualify for—right?
Not necessarily.
When you’re preparing to buy a home, there’s an important difference between how much money you earn and how much of that income a lender can actually count as qualifying income.
This is Part 2 of our series covering four financial areas future homebuyers should understand: credit, income, debt-to-income, and assets. After starting with credit in Part 1, we’re taking a closer look at income and how lenders may evaluate it.
Not All Income Is Evaluated the Same Way
If you’re a salaried W-2 employee earning $100,000 per year, documenting your income may be relatively straightforward.
But what if that $100,000 is made up of different types of income?
For example, you might earn:
$70,000 in base salary
$15,000 in commissions
$10,000 in bonuses
$5,000 in overtime
You still earned $100,000, but a lender may not necessarily be able to use every dollar when determining your qualifying income.
For income such as commissions, bonuses, and overtime, lenders may look for a history showing that the additional income has been earned consistently and is likely to continue. The specific requirements can vary depending on the loan program and your individual circumstances.
That means earning $100,000 last year doesn't automatically mean you have $100,000 in qualifying income.
What If You Recently Got a Raise or Changed Jobs?
Now consider a different scenario.
You were earning $50,000 per year and recently accepted a new salaried position paying $100,000.
You might assume a lender would need to average your old and new salaries together. But depending on your circumstances and loan program, a lender may be able to qualify you using your new salary instead.
This is also why changing jobs before buying a home isn't automatically a problem.
What matters is the bigger picture—including the type of employment, how you're compensated, your employment history, and the requirements of the mortgage program you're using.
Self-Employed Income Can Be More Complex
For self-employed buyers, income qualification can look very different.
Your business might generate significant revenue, but lenders aren't simply looking at the amount of money coming into the business.
They may evaluate factors such as your:
Tax returns
Business and personal income
Expenses
Deductions
Length and stability of self-employment
Actual qualifying income
This distinction is especially important for business owners who take significant deductions. Strategies that reduce taxable income can also affect the income available for mortgage qualification.
If buying a home is one of your goals, it can be helpful to understand how those decisions may affect your financing before you're ready to submit a mortgage application.
Planning to Buy in the Next 12–24 Months?
If homeownership is on your radar within the next year or two, be thoughtful about major changes to how you earn your income.
Changing jobs doesn't necessarily prevent you from qualifying for a mortgage. But changes such as moving from a salary to commission-based compensation, becoming self-employed, or significantly changing your compensation structure may affect how your income is evaluated.
Talking with a qualified mortgage professional early can help you understand what documentation may be needed and how a potential career or compensation change could affect your homebuying plans.
It’s Not Just How Much You Make
When preparing to buy a home, the number on your paycheck is only part of the equation.
The more important question may be:
How much of your income can a lender actually count?
Understanding that distinction well before you're ready to buy can help you make more informed financial and career decisions—and avoid surprises when it's time to get pre-approved.
Next in our homebuyer financial series, we're covering debt-to-income (DTI) and how your existing monthly debts can affect how much home you may qualify for.
Thinking about buying a home in Austin or the surrounding area? Connect with Pinnacle Property Group to start planning your next move and learn what steps you can take now to prepare for homeownership.
Mortgage qualification guidelines vary by lender and loan program. Consult with a qualified mortgage professional regarding your specific financial situation.
