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How Nevada Lenders Calculate Overtime & Bonus Income

Q: What is the minimum history required to use bonus income for a mortgage qualification?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: How do lenders typically calculate overtime pay for a loan application?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: What documentation is necessary to use cash tips as qualifying income?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: What is a Verification of Employment (VOE) and what information does it contain?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: What happens if my bonus or commission income has decreased recently?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: How does including variable pay affect my Debt-to-Income (DTI) ratio?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: Can I still use bonus income to qualify for a mortgage if I recently changed jobs?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

Published By

David Ghazaryan

Owner / Broker / Banker

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TL;DR

Stable History is Key: To use variable income like bonuses, overtime, or tips for a mortgage, lenders generally require a consistent two-year history of you receiving it. This demonstrates to underwriters that the income is stable and likely to continue.
Documentation is Crucial: You must provide clear proof of your earnings. This includes documents such as your last two years of W-2s, recent pay stubs, federal tax returns (especially for tips), and a formal Verification of Employment (VOE) completed by your employer.
Boosts Borrowing Power: Properly documenting and averaging your variable pay increases your total qualifying income. This lowers your debt-to-income (DTI) ratio, which can be the deciding factor between loan approval and denial.

The Minimum History Required for Bonus Pay

For most mortgage lenders, a two-year history of receiving bonus pay is the standard requirement for it to be considered stable and recurring income. Underwriters need to see a consistent pattern of you earning this income. While receiving it from the same employer is ideal, it is not always required if you have changed jobs but remained in a similar field with a comparable pay structure. A one-time bonus, no matter how large, typically cannot be used for qualification purposes because it is not seen as likely to continue. (The data, information, or policy mentioned here may vary over time.)

Key requirements include:

Two-Year W-2s: Your W-2s from the last two years must show the bonus income.
Year-to-Date (YTD) Pay Stub: A recent pay stub showing your current YTD bonus earnings helps confirm the income is ongoing in the current year.
Written Verification of Employment (VOE): Your employer must complete a form that breaks down your base pay versus your bonus pay and confirms the likelihood of continued payment.

If you have a history of receiving bonuses but recently changed jobs, an exception may be possible if you stay within the same industry and role. For example, a car salesman in Las Vegas who moves to a different dealership may still qualify if the bonus structure is similar and documented.

Averaging Overtime Income: The 12 vs. 24-Month Rule

Lenders typically average your overtime income over a 24-month period. This long-term view helps smooth out any monthly or seasonal fluctuations, providing a more conservative and stable income figure. They want to avoid approving a loan based on a recent, temporary spike in overtime hours. If the income has been received for less than two years, a shorter average may be used, but a history of at least 12 months is generally required. (The data, information, or policy mentioned here may vary over time.)

Here’s how the calculation works:

Gather Income: The lender totals the overtime earnings from the last 24 months.
Calculate Monthly Average: They divide that total by 24.

Calculating average monthly income for a mortgage application.

Calculating Your Average in Reno

Let's say you're a nurse in Reno with fluctuating overtime hours.

Last year's overtime earnings (Year 1): $12,000
Previous year's overtime earnings (Year 2): $9,600
Total Overtime: $12,000 + $9,600 = $21,600
Average Monthly Income: $21,600 / 24 = $900 per month

The lender will add this $900 to your regular base salary to determine your total qualifying monthly income. A 12-month average is most often used when the income has been received for at least 12 but less than 24 months, or if the income shows a consistent increasing trend.

How to Document Cash Tips for a Mortgage Application

For workers in Nevada's thriving hospitality industry, documenting cash tips is essential for mortgage qualification. Unreported or undocumented tips are invisible to a lender. You must prove this income through official records.

Federal Tax Returns: The most critical document is your filed tax returns, including all schedules. Lenders will use the income you claimed to the IRS. If you did not claim your cash tips on your tax returns, you cannot use them to qualify for a mortgage.
Bank Statements: Show consistent deposits of your tip income into your bank account over the last 12-24 months. The deposit patterns should reasonably align with the income reported on your tax returns.
Employer Verification: Your VOE should state that your position customarily receives tips.

Underwriters will typically average the tip income reported on your last two years of tax returns. Consistency is key. A significant, unexplained drop in reported tips from one year to the next could raise a red flag.

Using an Employer Letter to Prove Income Consistency

Yes, a letter from your employer—officially known as a Verification of Employment (VOE)—is a mandatory and powerful tool. This is not just a simple letter; it is often a standardized form the lender sends to your employer's HR department. It serves as official proof of your income's stability and structure.

What Should a Verification of Employment (VOE) Include?

A lender-provided VOE will ask your employer to confirm:

Your dates of employment
Your current position and base salary
A breakdown of your income for the past two years, separating base pay, overtime, commissions, and bonuses.
The likelihood of continuance for any variable income. The employer must state that the overtime, bonus, or commission is likely to continue in the foreseeable future.

If your employer simply writes 'overtime is not guaranteed', an underwriter may refuse to count it. The phrasing on the VOE is critical for getting your variable income approved.

What If My Bonus or Commission Income Decreased?

If your variable income has declined, lenders will almost always use the most conservative figure. For example, if your bonus was $20,000 two years ago but only $15,000 last year, the underwriter will likely use the lower 12-month average or a figure based on the declining trend.

Significant Decline: A decline of 25% or more will likely trigger extra scrutiny. You may need to provide a letter of explanation detailing the reason for the decrease. Was it due to a market shift, personal leave, or a change in commission structure? (The data, information, or policy mentioned here may vary over time.)
YTD Income: The lender will heavily weigh your year-to-date earnings. If your YTD income shows the decline is continuing, they will use that lower figure. If your YTD income shows a rebound, it can help your case, but they will still be cautious.

Being proactive with a letter of explanation can help provide context to the underwriter, especially if the decline was temporary.

How Income Averaging Affects Your Debt-to-Income (DTI) Ratio

Your Debt-to-Income (DTI) ratio is the percentage of your gross monthly income that goes toward paying your monthly debt payments. It is one of the most important factors in mortgage qualification. By averaging and including your variable pay, you increase your total qualifying income, which lowers your DTI ratio and boosts your borrowing power.

Homebuyer in Henderson considering their debt-to-income ratio.

A Henderson Homebuyer DTI Example

Imagine a buyer in Henderson looking to qualify for a mortgage.

Scenario 1: Base Salary Only

Gross Base Salary: $5,000/month
Proposed Housing Payment (PITI): $2,200
Car Loan: $400
Credit Card Minimums: $150
Total Monthly Debts: $2,200 + $400 + $150 = $2,750
DTI Ratio: ($2,750 / $5,000) = 55% DTI (This is generally too high for most loan programs) (The data, information, or policy mentioned here may vary over time.)

Scenario 2: Base Salary + Averaged Overtime

Gross Base Salary: $5,000/month
Averaged Overtime: $1,200/month (based on a 24-month history)
Total Qualifying Income: $5,000 + $1,200 = $6,200/month
Total Monthly Debts: $2,750
DTI Ratio: ($2,750 / $6,200) = 44.3% DTI (This is within acceptable limits for many conventional and FHA loans) (The data, information, or policy mentioned here may vary over time.)

As you can see, properly documenting that $1,200 in monthly overtime makes the difference between denial and approval.

Best Loan Programs for Variable Income Earners in Nevada

While rules can vary by lender, most major loan programs have similar guidelines for variable income. (The data, information, or policy mentioned here may vary over time.)

Conventional Loans (Fannie Mae/Freddie Mac): These loans typically require a solid two-year history of variable pay. They are strict about documentation but offer excellent rates if you qualify. They are often a great fit for salaried employees with a long, stable history of bonuses or commissions.
FHA Loans: Insured by the Federal Housing Administration, FHA loans have similar two-year history requirements but can sometimes be more flexible if you have compensating factors, like a large down payment or low DTI. They are a good option for buyers with less-than-perfect credit.
VA Loans: For eligible veterans and service members, VA loans generally follow the two-year rule but can sometimes make exceptions for service members whose income changes due to new assignments or roles, as long as the income is deemed stable and likely to continue.
Non-QM Loans: For borrowers who do not fit traditional guidelines, Non-Qualified Mortgages (Non-QM) offer more flexibility. Some Non-QM programs may allow for a 12-month average of variable income or use bank statements to verify income for self-employed individuals, but they typically come with higher interest rates. Understanding how your unique income is viewed by lenders is the first step. If you're in Nevada and earn variable pay, discussing your documentation with a mortgage strategist can clarify your true buying power and help you prepare for a successful application.

Ready to see how your bonus, overtime, or tips can strengthen your mortgage application? Get a clear picture of your buying power. Apply now to get started.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.