Why Lenders Require a Two-Year History for Bonus Income
When you apply for a mortgage, lenders want to see income that is stable, predictable, and likely to continue. Your base salary easily meets this standard, but variable income like bonuses, commissions, and Restricted Stock Units (RSUs) is less certain. An underwriter can't be sure you'll receive the same bonus next year, or that your commission structure won't change.
To mitigate this risk, mortgage guidelines established by entities like Fannie Mae and Freddie Mac require a two-year history of receiving that variable income. This track record demonstrates a pattern of earnings and proves that this income is a regular part of your compensation, not a one-time windfall. A consistent two-year history gives the lender the confidence they need to count it toward your qualifying income, which directly impacts how much you can borrow.
Without this history, the income is considered too speculative to be included in your debt-to-income (DTI) ratio calculations.
How Is a Multi-Year Average Calculated for Qualifying?
Once you’ve established a two-year history, underwriters don't just use your most recent bonus amount. Instead, they calculate an average over the past 24 months to create a conservative and stable monthly figure. This smooths out any large fluctuations from one year to the next.
The calculation is straightforward:
- Add the total variable income from the last two years.
- Divide that total by 24 to get your average monthly qualifying income.
Example Calculation: Let's say your base salary is $100,000 per year ($8,333/month).
- Year 1 Bonus: $20,000
- Year 2 Bonus: $28,000
Here’s how the underwriter would process it:
- Total Bonus Income: $20,000 + $28,000 = $48,000
- Average Monthly Bonus Income: $48,000 / 24 months = $2,000
- Total Qualifying Monthly Income: $8,333 (base) + $2,000 (bonus) = $10,333
This averaged amount is then added to your base salary to determine your total income for mortgage qualification.
Are There Exceptions for a New Job If I'm in the Same Industry?
Yes, exceptions are possible, but they depend heavily on the lender and your specific circumstances. If you change jobs but remain in the same line of work with a similar pay structure, an underwriter may be willing to use your previous employer's bonus history to meet the two-year requirement.
For this to work, you must clearly demonstrate:
- Continuity: You moved from one company to another in a similar role (e.g., a software salesperson to another software salesperson).
- Similar Pay Structure: Your new compensation includes a bonus or commission plan that mirrors your previous one.
- Documentation: You can provide W-2s and pay stubs from the prior employer to prove the two-year history of earning variable income.
The lender will verify this through a Verification of Employment (VOE) form sent to both your current and previous employers. While some lenders will accept this, others may stick to a strict interpretation and require at least a one-year history at the new job before counting any variable pay. The data, information, or policy mentioned here may vary over time.
What Are the Specific Rules for Counting RSU Income for a Mortgage?
Restricted Stock Units (RSUs) are a common form of compensation in the tech industry, but they come with unique rules for mortgage qualification. Because their value is tied to the stock market, lenders are extra cautious.
Here’s what you need to know:
Vesting History is Key
Lenders need to see a history of your RSUs vesting (meaning you have received the shares and they are yours). Lenders typically require a two- to three-year history of vesting to consider it as qualifying income. Some may consider a shorter history if other aspects of your financial profile are very strong.
Proof of Continuance
In addition to history, you must prove that you are scheduled to receive more RSUs in the future. Your vesting schedule, provided by your employer or brokerage, will show the number of shares and dates for future vesting events. Without evidence of continuance, the income will not be counted.
Calculation Method
Underwriters typically calculate RSU income by averaging the value of vested shares over the past 24 months.
Example RSU Calculation:
Year 1: 100 shares vested at a market price of $150/share = $15,000
Year 2: 100 shares vested at a market price of $200/share = $20,000
Total RSU Income: $15,000 + $20,000 = $35,000
Average Monthly RSU Income: $35,000 / 24 months = $1,458
This $1,458 would be added to your total qualifying monthly income. Some lenders may use a more conservative approach, such as using the lower value from Year 1, especially if the stock price is volatile. The data, information, or policy mentioned here may vary over time.
What Documents Will I Need From My Employer?
Being prepared with the right documentation is the most important step in getting your variable income approved. An underwriter needs a complete paper trail to verify every dollar. Make sure you have the following documents ready:
- W-2s: Your last two full years.
- Pay Stubs: The most recent 30 days of pay stubs showing a clear breakdown of your earnings, including base pay, bonus, commission, and year-to-date (YTD) totals.
- Federal Tax Returns: Your complete, signed federal tax returns for the last two years, including all schedules.
- Verification of Employment (VOE): The lender will send this form directly to your employer’s HR department. It will ask for a detailed breakdown of your income for the past two years and the likelihood of continuance.
- RSU Documentation (if applicable):
- Your official Vesting Agreement or Stock Plan Description.
- Statements from your brokerage account showing when shares vested and their value at the time of vesting.
Can a Written Offer Letter Detailing Future Bonuses Be Used?
Generally, no. An offer letter is excellent for proving your base salary at a new job, but it is almost never sufficient for qualifying with future, unearned bonus income. The core principle of underwriting is to rely on historical and proven income, not potential earnings.
Future bonuses are speculative. They might be tied to company performance, individual metrics, or other contingencies. Unless the bonus is 100% guaranteed and non-contingent (which is extremely rare), an underwriter will not count it. You must have a history of receiving the income before it can be used to qualify for a loan.
How Does Declining Bonus Income Affect Me?
A downward trend in your bonus or commission earnings is a major red flag for underwriters. If your variable income has decreased from one year to the next, it signals instability and increases the lender's risk. In this scenario, the lender will take a more conservative approach.
Example of Declining Income:
- Year 1 Bonus: $40,000
- Year 2 Bonus: $25,000
An underwriter will not use the 24-month average in this case because it would inflate your qualifying income based on a past, higher-earning period. Instead, they will likely:
- Use only the most recent, lower amount ($25,000) and average it over 12 or 24 months.
- In some cases, they may decline to use the income at all if the decline is significant and unexplained.
To overcome this, you may need a letter of explanation (LOX) from your employer detailing why the bonus was lower and confirming the expectation of future bonuses. The data, information, or policy mentioned here may vary over time.
What Loan Programs Are More Lenient With Variable Income?
If you're struggling to get your variable income counted under standard guidelines, some loan programs offer more flexibility.
Conventional and Government-Backed Loans
- Conventional (Fannie Mae/Freddie Mac): These loans have the most standardized rules and are typically firm on the two-year history requirement.
- FHA and VA Loans: While sometimes perceived as more flexible, their guidelines for variable income are very similar to conventional loans. They also generally require a two-year history.
Non-QM Loans
- Non-Qualified Mortgages (Non-QM) are the best option for borrowers who fall outside traditional underwriting boxes. These loans are not bound by Fannie Mae or Freddie Mac rules, giving lenders the freedom to use alternative qualification methods.
- A Non-QM lender might be willing to approve a loan with only a 12-month history of bonus or RSU income. Some may even use bank statement analysis to verify income instead of traditional W-2s.
- The trade-off for this flexibility is often a slightly higher interest rate, but for many borrowers with significant variable income, it’s the key to securing a home loan. The data, information, or policy mentioned here may vary over time. If your income structure is complex, don't let one denial discourage you. A mortgage strategist who understands the nuances of variable income rules can analyze your complete financial picture and present your file for a successful approval. Reach out to an expert who can explore all available loan programs, including flexible Non-QM options.
Navigating mortgage qualification with variable income can be challenging, but you don't have to do it alone. Our experts specialize in complex income scenarios and can help you understand your options. Take the first step towards your new home and Apply now for a personalized assessment.
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.
References
Fannie Mae Selling Guide: B3-3.1-09, Other Sources of Income
