Can you use a bonus to qualify for a mortgage?

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

You can use a bonus to get approved for a mortgage but you need to meet additional qualification guidelines. Below we explain how to use your bonus to qualify for a mortgage including the required income history and documents you need to submit with your loan application.

First, in almost all cases you need to show a two year track record of earning a bonus for lenders to factor the income into your debt-to-income ratio. In some cases, a bonus income history of between one and two years is permitted, although this is relatively unusual.

If you receive a bonus on a monthly, quarterly or semi-annual basis, lenders may be more willing to allow the shorter income history. Additionally, if a portion of your income was recently changed from salary to a bonus, then the twelve-to-twenty four month history may be allowed. Please note that in all cases a bonus history of at least one year is required.

To verify your bonus, you are required to provide a Verification of Employment form or your most recent pay stub and W-2s for the prior two years that show your bonus income.

If you recently changed jobs, the lender is required to confirm that your bonus income is expected to continue at your new company. The lender also verifies your employment within ten days of your closing date either verbally.

The Verification of Employment form -- also known as a form 1005 -- is an industry-standard document that shows your total gross income including your base compensation and bonus. Keep in mind that your employer fills out the form without your input or participation and submits the completed document to your lender.

Instead of using a form 1005, you can provide the lender your most recent pay stub that shows your bonus (you are also required to provide your most recent pay stub regardless of if it reflects your bonus income) and your W-2s for the specified time period, which as noted above, is usually two years. You are typically also required to provide your tax returns for the prior to years, which should also confirm your bonus income.

Lenders determine your average monthly bonus income for the time frame it covers. If you receive an annual bonus, the lender divides the bonus figure by twelve months to calculate your average monthly income. If the bonus is paid semi-annually, the lender divides the figure by six months. If the bonus is paid quarterly, the amount is divided by three months.

For example, if you earn a $24,000 annual bonus, the lender uses $2,000 in average monthly bonus income ($24,000 ÷ 12 months = $2,000 per month). If you earn $24,000 in a semi-annual bonus, the lender uses $4,000 in average monthly income ($24,000 ÷ 6 months = $4,000 per month).

Your average monthly bonus income is added to any other income you earn, including your base salary or wages. The higher your total monthly income, the higher the mortgage amount you can afford.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you qualify for including your bonus income

Lenders also review your bonus income history to verify that it is stable or increasing. If your bonuses are increasing on a year-over-year or sequential basis, lenders calculate your average monthly income, as explained above.

On the other hand, if your bonus income decreased compared to the prior year or your previous bonus, the lender uses the lower current bonus figure to determine the monthly average income. If your bonuses are steadily declining with no signs of flattening, the income usually cannot be used for your mortgage.

We recommend that you contact multiple lenders in the table below to confirm their guidelines for using bonus income to qualify for a mortgage. This approach enables you to understand their qualification requirements upfront and also enables you to review their loan terms. Shopping lenders and comparing several loan quotes is the best way to save money on your mortgage.

Sources

"B3-3.1-03, Bonus Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, May 15 2012.  Web.

"B3-3.1-01, General Income Information."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, August 7 2019.  Web.