Yes. Overtime income can be used to qualify for a mortgage, but it must meet two key requirements: a 2-year history of receiving overtime from the same employer (or in the same field), and a reasonable expectation that it will continue. Lenders calculate qualifying overtime income by averaging the last 24 months of documented overtime pay, not by using the current rate.
The 2-Year Average Rule
Fannie Mae and FHA guidelines both require overtime income to be averaged over 24 months. If you earned $15,000 in overtime last year and $12,000 the year before, the qualifying overtime figure is $13,500 per year, or $1,125 per month. This is added to your base salary to determine total qualifying income. Lenders use the lower of the year-to-date figure annualized or the 24-month average if there's a significant discrepancy.
What If Overtime Has Been Declining?
If your overtime income has been trending down over the past two years, lenders may use the most recent 12-month average or the year-to-date figure rather than the full 2-year average. A significant and unexplained decline raises the question of whether overtime will continue, and if the trend suggests it won't, lenders may exclude it entirely. A letter of explanation from your employer about the availability of overtime in your position helps address this.
Less Than 2 Years of Overtime History
If you've been receiving overtime for less than 24 months, it generally cannot be counted, even if the amount is significant. The exception is if you changed employers and have documentation that overtime was also part of your previous position. In that case, the history may transfer if it's the same field and the same type of work. Overtime that began less than 12 months ago typically cannot be used at all.
Overtime vs. Bonus Income
Overtime and bonus income are both variable income types with similar documentation requirements, but they're treated slightly differently. Overtime is typically more predictable and tied to scheduled hours. Bonuses are more discretionary. Both require a 2-year history and both are averaged over 24 months. Part-time income from a second job follows a similar rule, 2-year history required, averaged for qualifying purposes.
Overtime income is legitimate earning power that workers count on every month. The frustrating thing is when borrowers are told their overtime 'doesn't count' because it hasn't been 24 months yet, at that point, the strategy is timing. If you're 8 months from the 2-year mark on overtime, it may make sense to wait. If you're at 22 months, we might be able to move forward with what you have. I look at the whole picture and help you understand where you stand before you apply.
Have a situation like this?
Call Dan at (661) 342-9381. He will review your specific situation in a free call.