Borrower: “Jay, why the hell can’t I qualify for a mortgage when I made $900,000 last year? You guys are pathetic!”
Jay: “Well, Bob, $800,000 of your income came from the sale of the land you inherited from your grandma, and the other $100,000 came from stock dividends – but you just sold your stock to use for your down payment. And your business selling used Band-Aids actually showed a loss of $37,000 last year. So, unless you can find a grandma who will die and leave you some land every year, we will have to resort to Non-QM financing…”
Income Needs to “Recur” Before Lenders Can Use It
The “conversation” at the top of my blog is a bit farcical, but not too far from reality. Borrowers are often confused when we can’t use their income, and it is often because it is not “recurring.”
Before we can use capital gains income (income received from selling assets), commission income, dividend income, interest income, and bonus income, we need to prove that there is a history and that it is likely to recur or continue indefinitely.
Borrowers usually need to prove that there is a history of at least two years, and they can do so by providing two years of tax returns.
To prove that the income will recur, borrowers need to prove that they still have additional assets to sell (or earn dividends from), and/or get letters from their employer.
We Can Use Capital Gains Income for Many Borrowers, If…
We can use capital gains income for many borrowers if they are in the business of buying and selling assets. These borrowers include real estate investors, securities traders, and collectors of various sorts.
Once again, though, we need to show a history on tax returns and prove that the borrowers still have assets to sell.
Don’t Sell Income-Generating Assets
Borrowers also need to remember that if they sell income-generating assets (yielding interest, dividends, or rents) to garner funds for a down payment or closing costs, we can no longer use the income generated by those assets – an issue that surfaces surprisingly often.