Can you use income from a note 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

Many people use notes receivable as an extra source of income. Simply put, a note is a loan that you extend to someone else. The note recipient makes payments to you -- the note receivable holder -- based on the terms of the note. Depending on how the note is structured, the monthly payment you receive may include only interest or both principal and interest.

The good news is that you can use income from a note or loan you hold to qualify for a mortgage. Unlike income from a job, however, you are required to meet a different set of requirements to document the note income when you apply for the loan.

To include income from a note in your mortgage application, you must meet the following requirements:

You must provide documentation that confirms that the note income is expected to last for at least three years from when you apply for the loan.

You must document that you have received note income for the past twelve months. You can document note income by providing your bank statements or other proof of receipt.  If you acquired the note within the prior year or have not received income from the note for the past twelve consecutive months, then the income cannot be included in your mortgage application.

You must provide the lender a copy of the note that outlines the key terms including the loan amount, monthly payment, interest rate and length.

If you satisfy these guidelines then the note income is added to any other income you receive to calculate your debt-to-income ratio and determine the mortgage you qualify. The higher your monthly gross income, the higher the mortgage you can afford.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan you can afford including note income

As long as you can provide the proper documentation, lenders prefer note income because it is typically a steady and stable source of income. Including this additional income in your mortgage application can significantly increase the loan you qualify for depending on the amount of the monthly note payment, your other income and your monthly debt expenses.

We recommend that you contact multiple lenders in the table below to confirm their qualification guidelines for note income and to find the best mortgage terms. Shopping several lenders and comparing loan proposals is the best way to save money on your mortgage.

Sources

"B3-3.1-09, Notes Receivable Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, October 2 2019.  Web.