With unemployment rates still very high, it certainly affects the home buying market. Most lenders require full disclosure of income in order to apply for a mortgage. This means one must have a job or some sort of income.

I received an email this weekend from someone wondering if they could include their unemployment as part of their income to qualify for a mortgage. He apparently went through a few months without gainful employment and presently has a job. In order to qualify based on his 2010 income and year to date income, he wants to add in the unemployment. He cannot do that, but others might be able to.

In order to use your unemployment payments as income, it must be a regular thing. Think of landscapers or construction workers that are seasonally laid off each year and collect for the time they are not working. This is allowed. However if there is merely a gap in employment, and the person is collecting, they may not use it as part of their annual income.

In light of this question, I thought it might be helpful to include a list of possible income sources that may be used to qualify for a mortgage. Here, I have included an excerpt from my book The New Rules for Mortgages (Alpha/Penguin) I thought it would be useful if not interesting.

Not everyone makes money the conventional way—by working.  There are other types of income that may qualify the borrower completely or in addition to ordinary income.

Interest and dividends:  A 2-year average is used to figure interest and dividends.  The principle used to generate the income must be available after the closing and remain in the accounts.  It cannot be a one-shot deal or a huge windfall on a stock tip; there has to be some history.

Notes receivable:  If you hold a personal note and are collecting interest for a minimum of 1 year back and 3 years forward, the interest may be added in as income.  If you hold a mortgage on a house or a note on a business, the payments collected may be used.  However, if your brother owes you $10,000 and pays you $100 a month in cash, you cannot use it.

Trust income:  If the trust is irrevocable and guarantees a payout for 3 years after closing, the income maybe used.  You’ll have to provide a copy of the trust agreement and proof of the previous 2 years of payments.  If your rich Aunt died and left you a ton of dough, but was afraid you would blow it, she would have created a trust to pay it out over time.

Capital Gains: A borrower may use capital gains income from the sale of publicly traded stock or real estate if this typical income for them.  In other words if you have stock and sell it to make a profit, buy another stock sell it to make profit, etc., you can use the profit as income.  You must prove that you have done this for at least three years by showing your tax returns as well as be able to forecast that there will be additional gains for the following three years.  In addition, you must maintain the same value of the original asset throughout the time period.  A three year average of net profits will be used to figure income

Stock Options: Stock options are a way that big shots get paid at big publicly traded companies.  It is simply receiving an option to purchase stock at a certain price in lieu of getting paid salary.  These can be used as income if there is a history of exercising these options, proof of the quantity of options available and the price and the schedule for vesting.  An average will be used to qualify for income purposes.

Retirement income and pension:  Income from IRAs, 401Ks, pensions and the like is used as if it is regular income.  The lender will ask for proof of continued payments as well as tax returns.  They will take a harder look at your liquid assets and may require a larger down payment.  If the payout is a one shot deal, it cannot be used.  Furthermore, if a portion of the principle is being used to purchase the house, a percentage of the income will be reduced accordingly. Please know it is illegal for lenders to discriminate against age, so it does not matter how old the borrower is.

Social Security, disability, and public assistance:   This income must be verified as nontaxable.  You’ll be required to provide documentation and tax returns.  You must also show proof that it’s likely to continue for a minimum of 3 years.  Temporary, partial, or permanent disability all qualify.

Alimony and child support:  You must show you have received alimony and/or child support for minimum of 6 months and prove it will continue for 3 years.  You will only have to provide limited documentation due to privacy restrictions.

Foreign income:  You will have to show proof of income; the lender will determine the currency exchange rate.  If you have investment income, rental income or self-employment income reported in another country, it could be used as income.  Non-Permanent Resident Aliens may not use foreign income to purchase property in the US.  If you are getting a high interest return on your secret Swiss bank account, leave it off the loan application.

Working for family owned business: This income may be used, but an extra layer of review will be performed.  The lender will ask for the last two years’ tax returns, W—2’s and verbal verification of employment and job status.  The lender might request proof of company ownership to make sure borrower is really not self-employed.

Foster care:  You’ll have to show proof from an agency that you’ve received income from being a foster care provider for a minimum of 12 months and that you’ll likely continue. Income is limited to a baker’s dozen of children.—kidding

Boarder income:  This income may be used if a “relative” has lived with you for at least 12 months and pays rent, can provide proof of residency (license, passport, etc.) and provide 12 months’ canceled checks. A relative is defined as blood, adoption relative, fiancée, domestic partner or anybody that you are closely related to or sleeping with.  Boarder income can be no more than 30% of the total income needed to qualify for the loan.

Lottery for life:  This is my personal favorite. A friend of mine won $1,000 a week for life, gave up her job in New York City, and moved to Florida.  She bought a little condo on the beach in Miami, and there she happily resides.  (All she had to do was show documentation from the Lottery Commission and it was like a paycheck!)

 

Not everyone makes money the conventional way—by working.  There are other types of income that may qualify the borrower completely or in addition to ordinary income.

Interest and dividends:  A 2-year average is used to figure interest and dividends.  The principle used to generate the income must be available after the closing and remain in the accounts.  It cannot be a one-shot deal or a huge windfall on a stock tip; there has to be some history.

Notes receivable:  If you hold a personal note and are collecting interest for a minimum of 1 year back and 3 years forward, the interest may be added in as income.  If you hold a mortgage on a house or a note on a business, the payments collected may be used.  However, if your brother owes you $10,000 and pays you $100 a month in cash, you cannot use it.

Trust income:  If the trust is irrevocable and guarantees a payout for 3 years after closing, the income maybe used.  You’ll have to provide a copy of the trust agreement and proof of the previous 2 years of payments.  If your rich Aunt died and left you a ton of dough, but was afraid you would blow it, she would have created a trust to pay it out over time.

Capital Gains: A borrower may use capital gains income from the sale of publicly traded stock or real estate if this typical income for them.  In other words if you have stock and sell it to make a profit, buy another stock sell it to make profit, etc., you can use the profit as income.  You must prove that you have done this for at least three years by showing your tax returns as well as be able to forecast that there will be additional gains for the following three years.  In addition, you must maintain the same value of the original asset throughout the time period.  A three year average of net profits will be used to figure income

Stock Options: Stock options are a way that big shots get paid at big publicly traded companies.  It is simply receiving an option to purchase stock at a certain price in lieu of getting paid salary.  These can be used as income if there is a history of exercising these options, proof of the quantity of options available and the price and the schedule for vesting.  An average will be used to qualify for income purposes.

Retirement income and pension:  Income from IRAs, 401Ks, pensions and the like is used as if it is regular income.  The lender will ask for proof of continued payments as well as tax returns.  They will take a harder look at your liquid assets and may require a larger down payment.  If the payout is a one shot deal, it cannot be used.  Furthermore, if a portion of the principle is being used to purchase the house, a percentage of the income will be reduced accordingly. Please know it is illegal for lenders to discriminate against age, so it does not matter how old the borrower is.

Social Security, disability, and public assistance:   This income must be verified as nontaxable.  You’ll be required to provide documentation and tax returns.  You must also show proof that it’s likely to continue for a minimum of 3 years.  Temporary, partial, or permanent disability all qualify.

Alimony and child support:  You must show you have received alimony and/or child support for minimum of 6 months and prove it will continue for 3 years.  You will only have to provide limited documentation due to privacy restrictions.

Foreign income:  You will have to show proof of income; the lender will determine the currency exchange rate.  If you have investment income, rental income or self-employment income reported in another country, it could be used as income.  Non-Permanent Resident Aliens may not use foreign income to purchase property in the US.  If you are getting a high interest return on your secret Swiss bank account, leave it off the loan application.

Working for family owned business: This income may be used, but an extra layer of review will be performed.  The lender will ask for the last two years’ tax returns, W—2’s and verbal verification of employment and job status.  The lender might request proof of company ownership to make sure borrower is really not self-employed.

Foster care:  You’ll have to show proof from an agency that you’ve received income from being a foster care provider for a minimum of 12 months and that you’ll likely continue. Income is limited to a baker’s dozen of children.—kidding

Boarder income:  This income may be used if a “relative” has lived with you for at least 12 months and pays rent, can provide proof of residency (license, passport, etc.) and provide 12 months’ canceled checks. A relative is defined as blood, adoption relative, fiancée, domestic partner or anybody that you are closely related to or sleeping with.  Boarder income can be no more than 30% of the total income needed to qualify for the loan.

Lottery for life:  This is my personal favorite. A friend of mine won $1,000 a week for life, gave up her job in New York City, and moved to Florida.  She bought a little condo on the beach in Miami, and there she happily resides.  (All she had to do was show documentation from the Lottery Commission and it was like a paycheck!)

Wouldn’t it be funny, if you did not know you qualified for a mortgage and did not have a “real” job?