In this article we explain how to use capital gains to get approved for a mortgage. Please note that using capital gains as income to qualify for the loan is different than using the proceeds from selling an investment to pay for the down payment on a home.
If you want to use an asset as the source of funds for your down payment, all you need to do is demonstrate that you received the proceeds from selling the asset prior to your loan closing. This is usually a relatively straightforward process that involves a one-time asset sale.
If you want to use capital gains from trading or selling stocks, property or other assets as income when you apply for a mortgage, you need to demonstrate a two year track record of gains according to your tax returns. Specifically, you are required to provide the Schedule D from your 1040 for your personal tax returns.
Schedule D shows your capital gains and losses for the year. If you do not report your gains on your personal tax returns, you cannot use the income to qualify for a mortgage.
Please note that lenders average your capital gains income from your tax returns for the past two years to determine the monthly income for your mortgage application. The example below illustrates how this calculation works:
Capital Gains Income for Mortgage
Year 1 Capital Gains: $50,000
(+) Year 2 Capital Gains: $60,000
(=) Total Capital Gains Over Past Two Years: $110,000
(÷) 24 months
(=) $4,585 monthly income
Using this approach to calculate capital gains income has multiple implications. First, using a two year time period reinforces that you need to demonstrate regular income over several years.
For example, if you realized a significant capital gain this year but had no income last year, then it may be challenging to use the gain to qualify for a mortgage. Additionally, if your capital gains declined significantly in the most recent year, the lender may use this lower income figure instead of the higher two year average.
Another point to keep in mind is that in addition to showing your past income, you are also required to demonstrate that you have sufficient assets to continue to earn capital gains in the future after your mortgage closes. If you do not hold enough assets, your past capital gains income is not included in your application.
For example, if your gains are generated from selling stocks, you need to show that your current investment portfolio enables you to earn similar income going forward. If your income is derived from buying and selling real estate, you need to currently own properties that you could sell to help pay your mortgage.
To document the current value of investment assets you are required to provide your most recent monthly or quarterly account statement. For properties, you are required to submit a schedule of the real estate you own.
Assuming you meet the qualification requirements for both your past income and current assets, your capital gains income is added to any other sources including employment earnings or other types of investment income.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford including capital gains income
As an aside, we should also highlight that capital losses are essentially ignored when you apply for a mortgage and are not subtracted from your other income.
To summarize, it is definitely possible to use capital gains to qualify for a mortgage to buy a home but the documentation requirements are more extensive. Lenders are required to verify that you have earned consistent capital gains income over the past two years and confirm that you hold assets that allow the income to continue.
We recommend that you contact multiple lenders in the table below to understand their qualification guidelines and to compare loan terms. This approach enables you to understand the loan you are eligible for upfront. Plus, shopping lenders is the best way to save money on your mortgage.
"B3-3.1-09, Other Sources of Income, Capital Gains Income." Selling Guide: Fannie Mae Single Family. Fannie Mae, October 2 2019. Web.