How does a trading loss affect my ability 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 January 22, 2021

As long as trading is not your primary source of income, trading losses are usually excluded from your application when you apply for a mortgage, even when the losses are repeated over multiple years.  If trading is your main or only source of income, however, the losses are deducted from any trading income or capital gains you generate to calculate your income and determine the mortgage you qualify for.

For example, if you earn $60,000 in annual gross income ($5,000 per month) from your job, and you reported $10,000 in trading losses for the year on your tax return, lenders still use the $5,000 in monthly gross income to determine the mortgage you can afford -- even if you have $10,000 in trading losses for the past several years.  This example demonstrates how in most cases lenders effectively ignore the trading losses and the losses do not impact the mortgage you qualify for. 

Use ourMORTGAGE QUALIFICATION CALCULATORto determine the loan amount you can afford

The reason trading losses are usually omitted from your mortgage application is because they reflect a loss in value of assets as opposed to an actual decline in your monthly income.  Again, this assumes trading is not your primary income source and that you have a full-time job or other way of earning a steady income.

In short, for a standard mortgage, lenders use your income rather than your assets to assess the mortgage you can afford. Additionally, if you want to avoid trading losses in the future you could simply stop selling assets even if their market value decreases significantly.

Keep in mind that if trading stocks, bonds, commodities, forex, Bitcoin or other assets is your main or only income source then trading losses are netted against any trading capital gains to determine the income for your mortgage application.  Additionally, if you want to use trading income to qualify for a mortgage -- be it as a primary or secondary income source -- you need to demonstrate a two year track record of trading income according to Schedule D of your tax returns.  If the trading income is not reported on your tax returns for at least the previous two years, you cannot use the income to qualify for a mortgage.

Lenders average your trading income over the prior two years to calculate your monthly income and use that figure to determine the loan you can afford.  For example, if you earned $50,000 in trading income last year and $40,000 in income the prior year, lenders use $3,750 in monthly income for your loan application ($50,000 year 1 + $40,000 year 2 = $90,000 / 24 months  = $3,750 average monthly income). 

You also need to demonstrate that you have sufficient assets to continue to earn similar trading income in the future.  So even if you have earned regular trading income in the past, if the current market value of your assets is too low to support a consistent level of income going forward, then you cannot include trading income in your application.

To summarize, lenders prefer to use predictable, stable income to qualify you for a mortgage.  This is why if you have a regular job or other source of steady income, lenders use that income and exclude trading losses from your application. 

If you can document that trading provides a consistent source of income, then it may help you get approved or increase the loan you qualify for. On the other hand, if trading is your primary source of income and you consistently report trading losses, the losses can make it much more challenging to qualify or reduce the mortgage you can afford.

Because qualification guidelines for trading income and losses may vary, we recommend that you contact multiple lenders in the table below to understand how they would handle your unique situation. It is important to understand your ability to qualify and the loan amount you can afford before you apply for the mortgage. Plus, shopping lenders enables you to find the best loan terms.

Sources

"B3-3.1-09, Other Sources of Income."  Selling Guide: Fannie Mae Single Family.  Fannie Mae, October 2 2019.  Web.