Overtime Income & Mortgage Approval

Qualifying for a Mortgage Using Overtime Income

When applying for a mortgage, borrowers often wonder whether overtime pay can be counted as qualifying income. The answer is yes, but only under specific conditions. Understanding how overtime income is evaluated helps ensure a smoother approval process and avoids surprises during underwriting.

What Counts as Overtime Income?

Overtime income includes any pay received for working beyond a standard workweek, usually defined as 40 hours. For mortgage purposes, it’s treated as variable income, which means it must meet certain consistency and likelihood standards to be included in qualifying income.

Documentation Requirements

To use overtime income, borrowers must provide comprehensive documentation. This typically includes:

• A recent pay stub showing year-to-date earnings, including overtime
• W-2s for the past two years
• A verification of employment (VOE) from the employer confirming overtime history and likelihood of continuance

History and Stability Matter

Most mortgage programs require a two-year history of receiving overtime income to consider it for qualification. This history demonstrates that the income is likely to continue. If the borrower has been with the same employer for at least two years and has consistently received overtime, that’s generally viewed favorably.

For borrowers with less than two years of overtime history, underwriters may still consider the income if it is likely to continue and there’s a strong case for stability. However, they will typically average the income over the time it’s been received.

Averaging Overtime Income

Lenders will average overtime income over the past two years (or the actual period if less than two years). For instance, if a borrower earned $10,000 in overtime in year one and $12,000 in year two, the average would be $11,000 annually. This average is then divided by 12 to get a monthly qualifying figure.

If the most recent year or year-to-date income is lower than previous years, it may be considered a declining income trend, which could raise concerns. In such cases, underwriters may either use the lower amount or omit overtime income altogether.

Trends and Continuity Are Key

Underwriters closely examine whether the overtime income trend is stable, increasing, or declining. A stable or increasing trend supports the case for including it as qualifying income. A declining trend, especially without a clear explanation, might disqualify the overtime from being used.

Employers must also confirm that overtime is expected to continue. If the employer indicates overtime is unlikely or seasonal, that could limit or negate its use in qualifying.

Frequent Job Changes or Gaps

If a borrower has changed jobs frequently or has significant gaps in employment, underwriters may be more cautious about including overtime income. They will assess whether the income pattern is consistent despite the job changes.

Program Differences and Considerations

While the general approach to overtime income is consistent across conventional, FHA, and VA loans, there are nuanced differences in documentation or interpretation. The core requirement remains the same: a demonstrated history and likelihood of continuance.

Bottom Line

Overtime income can be a valuable part of qualifying for a mortgage, but only if it’s well-documented, consistent, and expected to continue. Understanding how lenders evaluate this type of income helps applicants present a stronger case and avoid issues during underwriting.