Qualify for a Mortgage with Capital Gains Income?

Do you know anyone that has had regular capital gains income over the last few years from the stock market? It sure has been a roller coaster ride, and if you’ve hung on for the whole ride from the debacle in 2008 to the recent new highs, then maybe you have indeed had some capital gains, along with some nice losses. But have you had gains in back to back years? Have you had them for three years running? Capital gains income can be used to qualify for a mortgage if there has been a consecutive three year history of capital gains, in the three most recent years you are applying for a mortgage.

Capital gains income needs to be documented that it can be expected to continue. A mortgage lender documents the expected continuance of capital gains income by documenting all of a borrower’s assets by getting two months of the most recent bank statements. This can be tedious, but necessary. It would also be good to get a letter from the borrower’s accountant stating that there is a history of capital gains income and that this income is expected to continue. Of course, some accountants say they are not comfortable predicting future income, but it is not as if they are being held responsible for the statement; it’s just an opinion letter.

The income from capital gains is documented using the past three years’ tax returns, with all pages of each return required. Then a list of year-to-date capital gains is needed from the year in which they are applying for a mortgage. And last, this income is then averaged over the three years being documented with tax returns. However, as with other income that can vary, like self-employment income, if there has been a decline in capital gains income year-over-year, the underwriter may only use the lowest year of income instead of averaging all of them together. Where there are wild fluctuations, even if they are increasing, that income may not be averaged because a very large increase may not seem reliable. The final number that is used and determined as income may fluctuate from underwriter to underwriter, and from lender to lender. It is a bit subjective, unless the numbers are very stable.

However, I can tell you in 27 years of residential mortgage lending, it is very rare that I get to use capital gains income towards qualifying for a mortgage. It just never seems to be stable income. Some years there are capital losses instead of capital gains so we can’t count the income at all since there are not three consecutive years. Sometimes I feel there never seems to be a way to satisfy the folks at Fannie Mae and Freddie Mac.