Conventional Loans: How Much Income Do You Need?

Is your monthly income high enough for a conventional loan?

Income tax formA conventional loan's income criteria is determined by your financial circumstances. Your monthly income and bill payments may be used to calculate them.

The income requirements for conventional loans range significantly from those for FHA loans. When it comes to income limits and down payments, FHA loans are more forgiving. With a credit score of 580, you may be eligible for an FHA loan.

For individuals who can afford a larger down payment and meet the higher income earnings, a conventional loan is an alternative. The minimum down payment requirement is often 20% or more of the purchase price of the property, however there are exceptions to this standard; for example:
The Conventional 97 loan only needs a 3% down payment, but it is exclusively available to first-time home purchasers. Another program that demands a 3 percent down payment is HomeReady.

Loan officers and underwriters (the person who approves the application) often struggle to evaluate the applicant's monthly income.

Their worry is a result of the diversity of income payment options. Some workers are paid hourly (which may vary), while others are compensated weekly, every other week, or twice monthly, etc.

And when you add bonus or overtime money to their monthly or annual salary, you get a complicated equation. Consider the underwriting guidelines of the Federal National Mortgage Association's (also known as also known as Fannie Mae).

Conventional Mortgage Income Requirements

With Fannie Mae's underwriting requirements, a high priority is placed on the income stability of the borrower, which is understandable. For the duration of the loan, Fannie Mae is looking for assurances that the applicant(s) will be able to make their mortgage payments on a consistent basis.

If an applicant has a steady income flow, but changes jobs often, the applicant will be regarded as having a dependable income earnings for qualifying purposes.

Before a mortgage is approved, the lender must obtain information about the previous earnings of the borrowers. This helps them estimate the likelihood that the borrowers will continue to make their payments on time.

Furthermore, in addition to bonuses and commissions, large amounts of overtime compensation and employment that requires flexibility, such as that of craftspeople or contract employees, are examples of sources of income that are less predictable income.

Applicants with irregular income will have their monthly income computed by averaging their earnings over a period of time, according to the underwriters.

Conventional Loan Income Guidelines

All income calculated using an average method must be examined to determine the borrower's frequency of payments, payment history, and the income trend. Revenue from hourly employees with variable hours, as well as bonuses, commissions, and overtime, are examples of this kind of income.

History of Receipt: Variable income for at least two years is preferred; however, if a borrower's loan application demonstrates sufficient positive factors to offset a shorter income history, the borrower's loan application may be approved if the borrower has received variable income for at least twelve to twenty-four months.

Frequency of Payment: The lender must determine the borrower's income frequency (annually, bimonthly, monthly, quarterly, or weekly) in order to determine a reasonable estimate of the borrower's monthly income for trend analysis (see below).

The borrower earns a yearly bonus on March 31st. Divide the bonus by 12 (months) to estimate the monthly bonus amount.

When the March 31st bonus is divided by three months, the resulting average monthly payout is significantly greater and incorrect. Lenders must evaluate a borrower's most recent paycheck to ascertain if his or her year-to-date earnings and/or current overtime earnings are consistent.

It may still be utilized to support the loan application even if the borrower's income is inconsistent. For example, snow plow drivers in the winter or payroll employees who work longer hours during the holidays are instances of borrowers who earn cyclical overtime income.

Before considering the income amount in the trending analysis, the lender must examine and document any mismatch between year-to-date profits and the current period overtime.

Fannie Mae Continuity of Income

A critical component of successful homeownership is the borrower's confidence in his or her ability to maintain the level of income required to qualify for the loan in the near future.

Unless the lender has reason to believe otherwise and can verify the income's receipt history (as defined by the income category), the lender may assume that the income is steady, predictable, and likely to continue.
The lender is unlikely to seek further documents from the borrower.

How to Determine the Necessity of Federal Income Tax Returns

The lender must have copies of the borrower's signed federal income-tax returns for the previous year and two years. These documents are required to confirm the source of income and the borrower's employment.

Additional information on specific income tax return requirements can be found in Chapter B3-3, Income Assessment.

  • a person who leases out a rental property;
  • if income is received from seasonal work or contract employment (or unemployment compensation), as well as short-term employment, such as a tradesman or contract employee, 2 years of income tax returns are required:
  • if the borrower is employed by family members (two years tax returns are needed);
  • if the borrower is self-employed, tax returns are required
    obtains fund that cannot be independently verified by a competent and unbiased source (tax returns from the previous two years);
  • qualifies by utilizing tip money that was not reported by the employer on the W-2 and was documented on IRS Form 4137;
  • qualifies on the basis of capital gains; qualifies on the basis of capital gains;
  • qualifies on the basis of dividend and interest income;
  • qualifies on the basis of foreign income;
  • receives income from capital gains, royalties, or other non-employment sources as shown on IRS Form 1099;
  • receives income from corporations, limited liability companies, sole proprietorship, partnerships, or any other company arrangement in which the applicant owns at least 25% of the company's shares.
  • Two years’ tax returns are required if a borrower is employed by an interested party to the property sale;

Borrowers with an ownership interest of  25% or more in their company are regarded as self-employed.

Adjusting the Borrower's Gross Income Using Nontaxable Income

The lender should give particular attention to regular nontaxable sources of income, such as child support, Social Security, workers' compensation, some kinds of public assistance, and food stamps.

The lender will confirm that the borrower's source of income is tax-exempt. This verification may be made using award letters, insurance agreements, account statements, or any other documentation attesting to the income's nontaxable status.

In some cases, the lender may calculate the borrower's “adjusted gross income” by calculating the borrower's income by adding to the borrower's income an amount equal to 25 percent of the untaxed earnings. If the lender believes that the income is not taxable and that both the income and the borrower's tax-exempt status will continue.

While it is possible for a lender to determine that the amount of federal and state taxes that a wage earner earning the same amount of money would typically pay exceeds 25 percent of the borrower's nontaxable income. The lender should not use that amount to calculate the borrower's adjusted gross income, which should then be used to calculate the borrower's qualifying ratio (see below).

Rotating question markFrequently Asked Questions (FAQs)

Q. Does Fannie Mae have income limits?
A. Income limits apply to Fannie Mae's (conventional mortgage) HomeReady program. To be eligible, your income must be more than 80% of the area's median income (AMI). Apart from HomeReady, there are no income restrictions.

Q. Does gross income include tax-exempt income?
A. Fannie Mae and Freddie Mac recognizes non-taxable income as acceptable income for mortgage qualifying.

Q. Does gross income mean yearly or monthly? 
A. Lenders use “monthly” gross income.

Q. How much can you gross up non-taxable income on a conventional loan?
A. Non-taxable income  may be “grossed” up by 25%.


In conclusion, a conventional loan may be the best option for you if you have a good credit score and a reasonable amount of income. However, it is important to consult with a lender to find out if you meet the qualifications and to get an idea of the interest rate you may qualify for.