Is stipend income considered mortgage income?
Borrowers must possess sufficient income to demonstrate their ability to repay a mortgage loan when applying for one. However, not every borrower is paid a traditional salary or hourly wage. Some borrowers are paid a stipend by a company, school, or organization. Because stipend income is only temporary, lenders usually do not consider it when approving a mortgage. However, if your stipend income is expected to last for a long time, it may help you qualify. Here’s what you should know if you get a stipend and want to buy or refinance a house.
Mortgages and stipend income
Lenders typically do not consider short–term stipend income for mortgage applications because it is only temporary. General living stipends may be used to qualify for a mortgage loan from certain lenders.
Stipend earnings are explained
If you want to get a mortgage as a stipend earner, you should know what lenders consider stipend income. Stipend income is a type of payment given or awarded by a business, institution, or other organization in exchange for providing a service or maintaining a specific status – for example, being a college student or an intern working for a company.
This income is not earned wages; it is different from a salary and is intended to alleviate the recipient’s financial burden. A housing allowance, for example, is a type of stipend.
A stipend is typically given to anyone who is not eligible for a salary but requires money to cover living expenses. As a result, interns, fellows, clergy, apprentices, public servants, graduate assistants, and medical students are the most common recipients of stipends. A stipend is typically paid in a fixed amount each month and is usually considered taxable income.
How stipend income can assist you in qualifying
Keep in mind that lenders do not solely consider your income when deciding whether to approve you for a mortgage loan. Rather, they consider your income in relation to your monthly debts. This is referred to as your ‘debt–to–income ratio,’ or ‘DTI.’ According to Brian Martucci, finance editor at Money Crashers, stipend income cannot generally be added to the amount of income lenders consider when calculating your debt–to–income (DTI) ratio and deciding whether to approve your mortgage application.
Most loan programs have a DTI ratio cap of 43%. The higher your income, the larger the DTI mortgage you can get. Stipend income is not taxable and does not reduce debt.
Recognizing compensating factors
Compensating factors are defined as adjustments that lenders can make to a loan application to make a borrower appear more favorable based on their financial history.
A mortgage application’s flaws can be compensated for by these financial strengths. Some compensatory variables can help you get a home loan, but there are many more available. You may be eligible for a higher DTI if you have three to six months’ worth of mortgage payments and other housing costs in the bank (‘cash reserves’). Rent and a consistent payment history, additional income such as bonuses or overtime, residual income, and long–term stipend income are all compensating factors.
Stipend income as a compensating factor
To get the greatest deal, you’ll need to improve your application in other areas. Improve your credit score, save more for a down payment, or pay off existing debts like credit cards or student loans. Of course, doing all of those things at once is difficult. However, focus on the areas where you can have the most impact. Improving your personal finances, even if only a little, can go a long way toward loan approval.
Income types that can be used to qualify for a mortgage
Because stipend income is only considered as a compensating factor for mortgage qualification, you must have a primary source of income to be eligible for the loan.
However, this does not imply that you require a traditional W–2 job. A mortgage application can take into account a wide range of income types.
These are some examples:
- Regular pay/wages
- Self–employment earnings
- Earnings from commission
- Earnings from overtime
- Earnings from a part–time job
- Profits from investments
- Nontaxable earnings
- Earnings from unemployment (in rare cases)
If you’re not sure if your income qualifies for a home loan, speak with a lender or mortgage broker. Your loan officer will look at all of your sources of income to determine your mortgage eligibility.
Purchasing a home with a co–borrower
First–time home buyers with stipend income may have difficulty qualifying for a mortgage on their own. Lenders are unlikely to approve you if you are not eligible for a salary and only receive stipend income. This is where a co–borrower can help.
Buying with a full–time, salaried spouse, family member, or close friend allows you both to qualify for the loan based on your combined income and credit history.
You could buy a house based on the income of your co–borrowers, with your own stipend income possibly acting as a compensating factor. In this case, both you and your co–borrower would be responsible for monthly mortgage payments and would share any equity gains.
Nontraditional income can be used to qualify for a mortgage
You earn nontraditional income if you are self–employed or a gig worker. In such cases, you may be required to apply for a non–qualified (non–QM) mortgage loan. These loans are intended for people who have cash assets and want to buy a home but don’t have proof of consistent income.
Prepare to provide validating documentation demonstrating three years of continuous
Examine your home loan eligibility
Every mortgage borrower is distinct. Depending on your financial situation, stipend income may or may not be counted toward your mortgage loan.
Only a mortgage lender can tell you whether or not you qualify. So, if you’re ready to start looking for a home, the first thing you should do is get a home loan pre–approval.
A mortgage lender’s pre–approval will confirm your home buying eligibility, as well as your budget and mortgage interest rate.