Variable Employment Income

A guide to what your lender will be looking for when calculating and reviewing variable employment income for your mortgage application

Resources > Mortgage Manual > Income & Employment > Variable Employment Income

Variable employment income can be any income on your paystub that is not your base salary. Your base salary is typically outlined by an employment contract. There are also instances in which your base salary is considered variable, for example if you recently switched roles at your company or received a raise or a new compensation structure. Common examples of variable income are Hourly wages, Commission, Bonuses, Overtime, and Tips.

When using variable income to qualify for a mortgage, the lender is required to collect and review documentation that verifies the history of receipt, the frequency of payments, and how the amount of income received has changed over the past two years. Verifying variable income can be more open-ended and rigorous than verifying base salary, so in some cases, it may be easier to only count your base salary instead of including variable income. In the event that we need to include variable income for the approval process, this article will break down all of the documentation that will be required to qualify the income.

Calculating Variable Income

The calculation of the monthly verifiable income varies depending upon your history of receiving this income, your employment history, and the amount the income varies each time you receive it. The best place to start with any variable income is your W-2s and year-end pay stubs with complete YTD earnings broken down. The lender is going to compare the most recent two years of W-2s and year-end pay stubs and your current YTD paystub to determine if your variable income has increased, remained flat, or gone down over the past two years. When your variable income has increased, then the lender will average your annual income over the past two years. If it has remained constant then it will be that value. If however, your income has gone down (i.e. 2020 bonus income was less than 2019 bonus income) then the lender will only use the amount from the most recent year for qualification and approval purposes. 

What do we need?

  • Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may work as with a previous history of work preceding this period in the same line of work with the same type of income.
  • If you rely on overtime, commission, or bonus income, for qualifying purposes, you must have a history of no less than 12 months to be considered stable.
  • If you have recently switched jobs but received the same variable income at a previous job, then that should work to establish the two-year history.
  • All of your W-2s from the previous two years.
  • Most recent pay stub with YTD earnings.
  • Final pay stub of the previous two years with YTD variable income breakdown or WVOE (Written Verification of Employment).

Where can I find it?

Why do we need this?

  • The lender is required to determine the stability and continuity of any income source. Variable income requires additional historical and current documentation in order to validate this.
    • Example: If you are paid overtime on a biweekly basis, the most recent pay stub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income.
  • Any conventional mortgage is required to include a fully-vetted variable income analysis and the requirements to this include a review of the most recent two-year history of variable income as well as YTD receipt of income to ensure it has remained consistent and is expected to continue.

Common Issues

  • Material difference between YTD earnings and previous annual earnings or reported income.
  • If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the decline occurred.
  • We sometimes see borrowers confused about the income and employment requirements and the need for a 2-year history. All lenders require verification of a minimum of 2 years of income and employment. We will work with you to let you know what documentation you will need, but please be prepared to provide documents from the last 2 years.
  • If your YTD earnings reflect fewer hours worked or lower income earned than previous years, we will likely need to reevaluate your loan application at the new income.
  • Switching to a new type of variable income in the past year and there is no two-year history to verify income.