A mortgage involves a mutual agreement between a lender and a borrower.
The lender agrees to loan money for a home purchase, and the borrower agrees to pay it back. But before a lender doles out funds, the borrower has to establish their ability to repay the loan.
How? Through income assessment. By looking at an applicant’s income, a VA lender determines the size of loan a service member can handle. Only certain types of income can figure into the equation, and each income source must meet a “stability test” before being considered.
Stable, Continuing, Sufficient
The VA wants to ensure that borrowers are consistently able to pay their mortgages, so income must meet three standards. In order to count toward a VA loan application, income must be:
- Stable and reliable
- Anticipated to continue during the forseeable future, and
- Sufficient in amount
VA Loans are a Judgment Call
As the VA Lender’s Handbook clearly states, “income analysis is not an exact science. It requires the lender to underwrite each loan on a case-by-case basis, using:
- Common sense, and
- Flexibility, when warranted.”
That flexibility throws both pros and cons at potential VA borrowers. It gives service members some wiggle room, but also generates confusion: What types of income will count during the VA loan evaluation process?
Lenders Prefer Two Years of Consistent Income
The simplest way to explain it is this: The ideal VA loan candidate will have at least two years of consistent, continuing income that is sufficient to cover a mortgage payment.
But that doesn’t mean immediate denial for part-time applicants, disabled vets, or retired service members. Remember that flexibility, common sense, and judgment apply to each evaluation.
Types of Verifiable Income
During that evaluation, a VA lender can only consider certain types of income. Those types of income must be stable, reliable, and anticipated to continue, or they can’t be used in a lender’s assessment.
Sources of verifiable income generally include:
- Spouse’s salary (if the spouse is co-signing on the loan or the purchase is in a community property state)
- Income from overtime, part-time jobs, second jobs, and bonuses (if reliable and anticipated to continue)
- Commission-based income
- Self-employment income
- Some military allowances
- Retirement income
- Rental income
- Alimony, child support, and maintenance payments
- pension or other retirement benefits
- disability income
- stock dividends
- interest payments
- royalty payments
Sources That May or May Not Count
There’s definitely a gray area when it comes to VA loan income assessment. If a VA loan applicant’s income is derived from one of the following sources, a lender may or may not decide to count it in the total evaluation:
- Income from a brand new full-time job
- Income from a part-time or secondary job that has continued for less than two years
What Doesn’t Count?
Some income streams simply don’t measure up to the “stable and reliable” test. Lottery winnings or one-time Christmas bonuses aren’t considered stable for the purposes of acquiring a mortgage.
Other types of income that don’t typically count toward a VA loan include:
- Income from a job that will be ending soon
- GI Bill educational/housing allowances (since they typically end with the school term)
- Unemployment compensation
Still Have Questions?
Remember that income analysis is not an exact science. That’s why it’s critical to talk to an experienced VA lender about your options. You can reach a Veterans United VA loan specialist by calling 855-870-8845 or via VeteransUnited.com.
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