Income & employment

Income types explained

The Pre-Qualification Calculator lets you add income from several different sources, each calculated a little differently. Here is what each one means and how it gets treated.

W-2 Employment

Split into base earnings plus overtime, bonus, and commission. Base pay from a stable job is usable right away. Overtime, bonus, and commission are different — lenders want a track record, ideally 2 years and sometimes as little as 12 months on conventional loans, and they average what you've earned (FHA over 2 years; conventional typically year-to-date plus last year). If the trend is declining, that income may not count unless it has clearly stabilized.

Self-Employed / 1099

Qualifying income comes from your Schedule C: net profit (Line 31), plus certain non-cash expenses added back in, since they reduce your paper profit without actually costing you cash. Depreciation (Line 13) and depletion (Line 12) get added back. Meals and travel do not — those are real cash expenses. This is typically averaged over the most recent 2 years.

Social Security (and SSI)

Your monthly benefit amount qualifies directly. If your benefit is non-taxable (true for most Social Security recipients depending on total income), lenders can increase that non-taxable portion for qualifying — by 25% on conventional loans, and on FHA by your actual tax rate or 15% — since a non-taxable dollar is worth more than a taxable one for repayment purposes. Benefits on your own work record don't need proof they'll continue; survivor or dependent benefits must be shown to continue at least 3 years.

Pension

Treated the same way as Social Security — your monthly benefit amount qualifies, with the same non-taxable adjustment available if your pension is not subject to income tax.

IRA Distributions

Usable as income, but with a real catch: lenders need proof the account can sustain that withdrawal amount for at least 3 more years, and that you can access it without penalty. If the amount varies, expect to show 12 months of withdrawal history. A fixed, set-up distribution may need no history on conventional loans (a 2026 change).

Life Annuity

Similar to IRA distributions — you need to show the annuity will continue paying for at least 3 more years. This matters more here than for Social Security or a pension, since annuities can be structured with a defined end date.

Business ownership income

If you own part of a business — a partnership, an S-corporation, or a corporation — your income gets documented and calculated very differently than a sole proprietor filing Schedule C. This is genuinely more complex, case-by-case territory, so this section explains the concepts rather than a fixed formula.

The 25% ownership line

Own 25% or more of a business? You are treated as self-employed for that business, and your lender needs the business own tax returns in addition to your personal return: Form 1065 for a partnership or multi-member LLC, Form 1120-S for an S-corporation, or Form 1120 for a C-corporation. Own less than 25%? Documentation requirements are typically lighter, and business returns may sometimes be waived.

Schedule K-1 and Schedule E

A K-1 reports your share of a business's income or loss, similar to how a W-2 reports employment income. That K-1 income then flows onto Schedule E of your personal tax return. C-corporations do not issue K-1s at all — a C-corporation pays its own separate tax, and you are only paid through W-2 wages or dividends.

Ordinary income versus distributions

This is the part that surprises most business owners: the "ordinary income" shown on your K-1 is your share of the business paper profit, not necessarily cash you actually received. Lenders often rely on your actual distributions instead, unless the business can demonstrate enough liquidity (checked using a financial ratio) to support paying out the full profit shown. A business can look profitable on paper while genuinely not having the cash on hand to pay its owners.

Profit and loss statements

FHA loans generally require a year-to-date profit and loss statement once more than a calendar quarter has passed since the end of your most recent tax year. Conventional lenders usually don't require one, but may ask. It confirms your income has not declined since your last tax return, which only covers through the end of that tax year.

Job changes, gaps & new careers

Lenders care less about how long you've been at one employer than about whether your income is stable and likely to continue.

• The two-year standard: lenders look for a reliable two-year work history. It doesn't have to be one employer, and a shorter history can be accepted when the rest of the picture is strong.
• Changing jobs: a move within the same field at equal or higher base pay is usually fine. A switch to commission, bonus-heavy pay or self-employment is very different, because that income typically needs its own history, often two years.
• Gaps: expect to explain any gap in writing. On FHA loans, after a gap of six months or more you generally need to have been back at work for six months, with a two-year history before the gap.
• Recent graduates: time in school or training can help fill the two-year history. Have transcripts or a diploma ready.
• Starting a new job: on conventional loans you can sometimes close on an offer letter before your first paycheck, if the job starts within 90 days after closing, the pay is a fixed base salary, and you have extra reserves.

Child support & alimony

Support payments affect your loan whether you receive them or pay them, and they're treated very differently in each direction.

Child support or alimony you receive

You don't have to disclose this income. If you want it counted toward qualifying, it needs to meet three tests:

• It's in writing: a divorce decree, separation agreement or court order showing the amount and how long it lasts.
• It will continue: for at least three years after closing. Lenders check your children's ages against the order, so support for a 16-year-old usually can't be used.
• You've actually been receiving it: in full and on time. Bank statements or the state's payment record usually prove it.

Child support isn't taxed, so lenders can "gross it up", counting it as more than its face amount to put it on equal footing with taxable pay: by 25% on conventional, VA and USDA loans, and by 15% or your actual tax rate on FHA. $800 a month of child support can count as $1,000 on a conventional loan.

Irregular, partial or late payments are the usual reason this income gets excluded. If payments come through the state, ask for the official payment history.

Child support or alimony you pay

• It counts as a monthly debt whenever it's court-ordered or in a written agreement. On conventional loans that applies when more than ten payments remain.
• It counts even when it's not on your credit report. Lenders find it on your pay stubs, in your decree, and on your application, where you're required to list it.
• If it's deducted from your paycheck: lenders review your pay stubs for garnishments. On FHA loans, the amount used is whichever is higher: the amount in the order or the amount actually coming out of your check. A larger paycheck deduction usually means past-due support is being collected, and the larger number is the one that counts.
• If it shows on your credit report: a child support account in collections or with late payments is treated as a serious derogatory item, and it lowers your score.
• Alimony is treated differently from child support. Lenders may subtract alimony from your income instead of adding it to your debts, which often produces a better ratio. Child support must always be counted as a debt.
• Voluntary payments with no order or written agreement generally aren't counted.

Past-due child support is a real obstacle. USDA will not approve a borrower with delinquent court-ordered support unless it's paid, brought current, or on an approved repayment plan with payments made on time. Other programs reach the same place through their rules on judgments and garnishments, and FHA proposed a stricter rule in 2026. Get current, or get a written repayment agreement, before you apply.