How Lenders Document Variable Income

Lenders separate variable earnings from base pay, verify how long the borrower has received them, and compare prior-year totals with current year-to-date income before choosing a monthly amount.

Overtime, bonuses, commissions, and tips can count toward mortgage qualification, but the amount on the latest paystub is not automatically the amount a lender can use. The lender must document the history, separate each earnings type, and determine a stable monthly figure.

The lender needs an earnings breakdown

A current paystub should show year-to-date earnings. W-2s or year-end paystubs establish prior-year totals, while a written or verbal verification of employment may be used to separate base pay from overtime, bonus, commission, or tips and confirm whether the income is expected to continue.

Two years of history is the standard. A shorter history may be acceptable, but generally not less than 12 months, when the income is consistent and the borrower has positive supporting factors.

The recent trend controls the calculation

The lender compares prior-year earnings with the current year-to-date pace. Stable or rising income can usually support an average over the documented period. A meaningful decline cannot be ignored by averaging older, higher earnings into a larger number.

If the current pace has fallen, the lender may use the lower current amount. If the decline is continuing or the employer cannot support future receipt, the variable income may be excluded.

Scenario

A borrower earned $18,000 in overtime in 2024 and $15,000 in 2025. Averaging those two years produces $1,375 per month. Through June 2026, however, the borrower has earned only $4,800 in overtime, an $800 monthly pace.

The lender would not automatically use the $1,375 historical average while the current pace is $575 lower. If the employer confirms the reduced overtime is the new normal, the lender may use about $800 per month. If overtime is still shrinking or is no longer expected, the lender may use none of it.

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Have the income history reviewed before shopping

Bring a current paystub, the last two years of W-2s or year-end paystubs, and any employer earnings breakdown you have. DRG Mortgage can calculate the documented trend before you rely on variable income for a price target.

Schedule a Mortgage Review

Sources

Fannie Mae Selling Guide: Standards for Employment-Related Income

Freddie Mac Guide Section 5303.1: Employed Income

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