Annual income is the total income earned over one year before taxes, also referred to as gross annual income.
This includes salary, bonuses, commissions, tips, second jobs, part-time income, child support, alimony, and more for the borrower only, not including other members of the household.
When applying for a mortgage loan, lenders will only be able to include income that is consistent, such as wages and salary, or income you will be receiving for at least the next three years.
For child support and alimony, you’ll need to have a court order showing you will be receiving the income for at least the next 36 months to include it.
Net income is your annual income after taxes have been deducted.
Household income refers to the total gross income from all members of your household. This type of income is mainly used for programs not related to financing or lending.
Types of Income that can be used
- All taxable wages through your place of employment (w2’s, hourly and annual salary)
- Part-time and seasonal employment income
- Tips earned that are reported on your tax return (cash tips not reported cannot be used)
- Self-employment income before taxes after deducting your business expenses
- Social security income
- Pension and retirement income including 401k’s and IRA’s
- (SSDI) Social Security Disability Income
- Capital gains before tax
- Child support
- Income from investments
- Rental income (if you’ve been collecting rent income for at least six months)
Why my Annual Income is Needed?
A borrower’s annual income will be used to see how much of a mortgage they qualify for. Annual salary is used to calculate your debt-to-income ratio (DTI ratio).
Your debt-to-income ratio is the ratio of your gross monthly income to your total monthly debt payments. Debt payments include credit card minimum payments, auto loans, student loans, and any other type of loan or line of credit you make payments on monthly.
Two Year Annual Income Average
Unless you earn a salary, your annual income is usually calculated by taking the past two years of tax returns and dividing it by 2 to get your average income over the past two years.
If you’re self-employed, earn commissions or tips, or are paid an hourly wage, your last average income over the past two years will be used.
Annual Income FAQ
I’m receiving child support, but it is not court-ordered, can I claim it as income?
No. In order for child support or alimony to be considered as income, it must be court-ordered for the next three years.
Is your annual income, gross or net?
Unless it is specified, annual income is your gross income, before taxes.
I’m self-employed and didn’t make much in my first year, last year I made enough to qualify, how will it be calculated?
Self-employment income will be calculated by averaging your last two years of tax returns. If your mean income is too low, you will need to wait to apply for a mortgage.
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Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.