W2-Income-Only Mortgages on Traditional Loans

How to Qualify for a Mortgage with W2 Income
If you are a W2 employee, you may think that qualifying for a mortgage is easy. After all, you
have a steady income and a regular paycheck that shows your earnings. However, depending
on your situation, you may face some challenges when applying for a home loan. Here are
some tips on overcoming them and getting approved for the mortgage you want.

What is W2 income?
W2 income is the income that you report on your Form W-2, which is the document that your
employer sends you every year to show how much you earned and how much taxes were
withheld from your pay. W2 income includes base salary, bonuses, overtime, commissions, tips,
and other taxable benefits.

Why is W2 income important for mortgage lenders?
Mortgage lenders use your W2 income to determine your ability to repay the loan. They
compare your gross income (before taxes and deductions) to your monthly debt payments, such
as credit cards, car loans, student loans, and other obligations. This is called your debt-to-
income ratio (DTI), showing how much of your income goes toward paying your debts.
The lower your DTI, the better your chances of qualifying for a mortgage. Most lenders prefer a
DTI of 43% or lower, but some may accept higher ratios depending on various factors, such as
your savings, credit score, and down payment. Lenders also look at your income stability and
history, meaning how long you have been working in the same field and earning the same or
increasing income.

What are some challenges for W2 employees when applying for a mortgage?
While having a W2 income can make it easier to prove your income to lenders, it does not
guarantee that you will qualify for a mortgage. Some of the challenges that W2 employees may
face include:
• Having variable or irregular income. If you earn a large portion of your income from
bonuses, commissions, overtime, or tips, you may have trouble showing consistent and
predictable income to lenders. Lenders typically use an average of your last two years of W2
income to calculate your qualifying income. Still, they may also require additional
documentation, such as pay stubs, bank statements, or letters from your employer, to verify the
frequency and amount of your variable income.

• Having multiple sources of income. If you have more than one employer or work part-time
or freelance jobs besides your main W2 job, you may have difficulty proving all your income
sources to lenders. Lenders may require you to provide two years of tax returns, W2 forms, and
1099 forms (if applicable) for each of your employers or clients. They may also apply different

standards to different types of income, such as using only 75% of your part-time or freelance
income to account for potential fluctuations.
• Having unreimbursed business expenses. If you incur business expenses not reimbursed
by your employer, such as travel costs, mileage, equipment, or supplies, you may have to
deduct them from your gross income on your tax return. This can lower your taxable income and
reduce the amount of income that lenders can use to qualify you for a mortgage. To avoid this
problem, you may want to ask for reimbursement from your employer for these expenses or
provide you with an allowance or per diem that covers them.
• Having recent changes in income or employment. If you have recently changed jobs,
received a raise or promotion, switched from salaried to hourly pay or vice versa, or
experienced a gap in employment, you may have trouble proving your current and future
income to lenders. Lenders usually require at least two years of consistent employment history
in the same field or industry. Still, they may make exceptions if you can show that the change
benefits your career and income potential. You may also need to provide a letter from your
current or previous employer explaining the reason for the change and confirming your salary
and employment status.

How can W2 employees improve their chances of qualifying for a mortgage?
If you are a W2 employee who wants to apply for a mortgage, here are some steps you can
take to increase your chances:
• Save up for a larger down payment. A larger down payment can lower your loan-to-value
ratio (LTV), the percentage of the home price you borrow. A lower LTV can reduce the risk for
lenders and make them more willing to approve your loan. Additionally, it can reduce your
monthly mortgage payment and interest rate, enhancing your debt-to-income ratio (DTI) and
affordability.
• Improve your credit score. A higher credit score can boost your creditworthiness and show
lenders you are responsible for your finances. Improving your credit score can also enable you
to meet requirements for more favorable loan terms, including reduced interest rates and fees.
This, in turn, can decrease your monthly mortgage payment and improve your debt-to-income
ratio (DTI). To enhance your credit score, it is advisable to ensure timely payment of bills,
maintain low credit card balances, refrain from applying for new credit, and review your credit
report for any inaccuracies.
• Reduce your debt. A lower debt load can improve your DTI and free up more of your income
for your mortgage payment. To reduce your debt, you should pay off or consolidate your high-
interest debt, such as credit cards, personal loans, or payday loans. You should avoid taking on
new debt or making large purchases before applying for a mortgage.
• Shop around for the best mortgage deal. Lenders may offer different interest rates, fees,
and loan programs for W2 employees. You should compare multiple offers from different lenders
and choose the one that best suits your needs and budget. You can use online tools to estimate
how much you can afford to borrow and how much your monthly payment will be.

What loans can you apply for with a W2 income?
People with W2 income can avail of different types of mortgages depending on their income
level, credit score, down payment, and other factors. Some of the common mortgages for W2
employees are:
• Conventional mortgages. These mortgages are not backed or secured by the federal
government. They typically require a credit score of 640 or higher, a DTI of 43% or lower, and a
down payment of at least 3%. Conventional mortgages offer the flexibility of both fixed and
adjustable interest rates and various term options spanning from 10 to 30 years.
• FHA mortgages. The Federal Housing Administration (FHA), which operates under the
Department of Housing and Urban Development (HUD), provides insurance for these
mortgages. They cater to low-to-moderate-income borrowers with a credit score of 580 or
higher, a DTI or debt-to-income ratio of 50% or lower, and a minimum down payment of 3.5%.
FHA mortgages feature fixed interest rates and are available in 15 or 30-year terms.
• VA mortgages. These mortgages, supported by the Department of Veterans Affairs (VA),
provide lenders with a guarantee. They are specifically accessible to qualified veterans, active-
duty service members, reservists, National Guard members, and surviving spouses who meet
specific requirements. Typically, these requirements include a minimum credit score of 620, a
DTI of 41% or less, and no required down payment. VA mortgages offer borrowers the flexibility
to choose between fixed or adjustable interest rates and term options of 15, 20, 25, or 30 years.
• USDA mortgages. These are mortgages guaranteed by the United States Department of
Agriculture (USDA). They are available for low-to-moderate income borrowers living in rural
areas with a credit score of 640 or higher, a DTI of 41% or lower, and no down payment
requirement. USDA mortgages have fixed interest rates and terms of 15 or 30 years.

These are some of the most common mortgages for people with W2 income, but there may be
other options depending on your situation. Contact us to find out what mortgage you can qualify
for and what best suits your needs and budget.
Conclusion
Qualifying for a mortgage with W2 income is possible, but it may require some extra work and
documentation. You should be prepared to prove your income stability, history, and sources to
lenders and overcome any challenges from having variable, irregular, or multiple income
streams. In addition, it is advisable to enhance your financial position by setting aside funds for
a down payment, enhancing your credit score, and reducing your debt. Doing so can increase
your chances of getting approved for the mortgage you want and buying the home of your
dreams.