United States
Hong KongIncome and employment analysis
Lenders generally want two years of employment history and two years of tax returns for a self-employed borrower. Income must be stable, likely to continue, and verifiable.
The capacity limb of the three Cs. It asks one question: can this borrower keep paying?
The three tests
Income must be stable, likely to continue, and verifiable. All three, not any one.
A large bonus that arrived once is not stable. A contract ending in four months is not likely to continue. Cash income with no documentation is not verifiable.
The two-year rule
| Situation | Usual requirement |
|---|---|
| Employed | 2 years of employment history |
| Self-employed | 2 years of tax returns |
| Bonus or overtime | 2 years of receipt to be counted |
| Commission | 2 years, averaged |
Two years recurs constantly, and the reason is the same each time: one year could be an anomaly.
A move within the same field, at similar or higher pay, is usually acceptable and sometimes favorable. The concern is a gap or a change of industry, not movement itself.
Self-employment
Analyzed from tax returns rather than from deposits, and the figure used is generally net income after business expenses.
This surprises self-employed borrowers, who think of their gross revenue. Aggressive expense deductions reduce taxable income and reduce qualifying income by the same amount.
What generally cannot be used
- Income that will stop before or shortly after closing
- Unverifiable cash payments
- One-off windfalls
- Income from an illegal source
Non-taxable income
Some benefits and some retirement income are not taxed, and may be grossed up for qualifying because a dollar the government does not take goes further than one it does.
The permitted gross-up varies by program and by lender.
Common questions
How much employment history do lenders want?
Generally two years, though a move within the same field at similar pay is usually acceptable.
How is self-employed income calculated?
From two years of tax returns, generally using net income after business expenses.
What are the three tests for income?
It must be stable, likely to continue, and verifiable.
Can bonus income be used?
Usually where there is a two-year history of receipt and a likelihood of continuation.
What is grossing up?
Increasing non-taxable income for qualifying purposes, because it goes further than taxed income. The permitted amount varies by program.