There’s no disputing the fact that VA home loans are an outstanding benefit for veterans and active duty service members. The ability to refinance up to 100% with zero down payment is an incomparable advantage over traditional financing options. However, despite their exclusivity, VA loans are like other loans in that they require you to have qualifying income in order to be approved for financing.
1. What is qualifying income?
Qualifying income shows that the borrower has the right amount of income to cover the mortgage for which they are applying. To be approved for a VA home loan, the borrower must show that they meet three main standards of income: stability, continuing and sufficiency. In other words, the borrower’s income must be steady and reliable, expected to continue on a regular basis, and sufficient enough to cover the mortgage payments.
Stability is often determined by the applicant’s employment history. The VA requires that you must be able to show two years of consistent income, preferably documented through W-2s. If there are any gaps in employment in this two-year period, they must be substantiated. If there’s a break due to school or training for work, it can be counted toward the two-year requirement.
If you’re self-employed, you must also show a two-year history of employment, and proof of your qualified income will be taken from your most recent federal tax returns.
2. What kind of income is eligible?
Remember – the income must be stable, ongoing and sufficient enough to cover mortgage payments. But what kind of income is considered verifiable, or eligible?
- Salary/W-2 income
- Spouse’s salary (if the spouse is cosigning)
- Overtime or bonus income: An average of the bonus or overtime income over the last two years is used.
- Part-time income: May be used if you have a two-year employment history without interruption. Seasonal employment may be used if you can demonstrate a two-year history and proof that the position will continue.
- Commissions: An average over the previous two years. You must also provide your federal tax returns with all schedules, subtracting any business expenses for which you haven’t been reimbursed from your gross income.
- Retirement/Social Security: Verification is required. If the income is scheduled to expire within three years, this cannot be used to qualify as income.
- Alimony or child support: You can choose to use this as qualifying income, but you must provide a 12-month payment history from your ex-spouse or the court showing consistent payments made on time, and proof that the payments will continue for a minimum of three years. A copy of the divorce decree and/or child support order is required.
- Rental income: Must be received from investment properties you own. Income from roommates in a single-family property you occupy does not count. You may have to provide proof of experience as a landlord and proof of three months’ worth of mortgage payments.
There may be other forms of income that allow you to qualify for a VA loan. Talk to your Home Loan Expert to see if you qualify.
3. What kind of income is NOT eligible?
While the list of qualifying income is rather comprehensive, there are a few things that do not meet the VA’s standards. Income that is not eligible includes:
- Gambling or lottery winnings
- Unemployment compensation
- One-time performance bonuses
- Income from non-occupant co-borrowers.
Simply put, if there’s no consistent history (at least two years) of income, and there’s no proof of it being stable or continuing, the income may not be used.
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