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Bonus Income Mortgage Guidelines

Bonus income mortgage guidelines govern how lenders evaluate, document, and average bonus compensation for mortgage qualification, requiring a minimum two-year history of recurring bonus receipt, employer verification of the bonus structure, and trend analysis to establish a stable monthly income figure.

Key Takeaways

  • Lenders require a minimum two-year history of bonus receipt to include bonus income in the qualifying calculation; a single year of bonus income is generally insufficient .
  • Only recurring bonuses qualify; signing bonuses, one-time project bonuses, and discretionary awards without a pattern of recurrence are excluded from the income calculation.
  • Bonus income is averaged over the documented period (typically 24 months) and added to base salary to determine total qualifying income.
  • Declining bonus income triggers conservative treatment; the lender will typically use the lower year's bonus rather than the two-year average.
  • Employer verification must specifically confirm that the borrower is eligible for bonuses and that the bonus program is expected to continue.
  • Bonuses paid in stock, options, or non-cash compensation are generally not included in qualifying income unless they can be converted to cash and documented on tax returns.

How It Works

Recurring vs. Non-Recurring Bonuses

The first determination an underwriter makes is whether the bonus income is recurring. A recurring bonus is one that the borrower has received on a regular basis, typically annually, as part of the employer’s standard compensation plan. Examples include annual performance bonuses, profit-sharing distributions, and structured incentive payments tied to ongoing metrics. A non-recurring bonus is a one-time payment such as a signing bonus, a retention bonus paid during an acquisition, or a spot award for a specific accomplishment. Non-recurring bonuses are excluded from the qualifying income calculation because the lender cannot project their continuance. The borrower’s employment contract, offer letter, and employer verification are the primary sources for determining whether a bonus is recurring. If the borrower received a bonus two years in a row but the employer characterizes it as discretionary and not guaranteed, the lender will still generally include it as long as the pattern and employer verification support the expectation of continuance.

Averaging Methodology

Bonus income is averaged using the same two-year framework applied to other variable income types. The lender adds the bonus amounts from the two most recent calendar years and divides by 24 to calculate a monthly average. For example, if a borrower received a $15,000 bonus in 2024 and an $18,000 bonus in 2025, the two-year total is $33,000, and the monthly average is $1,375. If year-to-date information indicates the borrower has already received a bonus in the current year, the lender may factor that data point into the calculation using a weighted average. However, if the current year’s bonus has not yet been paid, the lender relies on the two prior years. The timing of bonus payments matters: if the employer pays bonuses in March for the prior year’s performance, the lender should match the bonus to the performance year, not the payment year, when evaluating trends.

Documentation and Verification Requirements

The lender requires specific documentation to verify and calculate bonus income. W-2 forms for the past two years show total compensation, but they do not typically separate bonus from base salary. The most recent pay stubs, particularly year-end stubs or stubs from shortly after bonus payment, often itemize bonus amounts. The Verification of Employment (VOE) is the critical document: the employer must confirm the bonus amounts paid in each of the past two years, describe the bonus structure (annual performance bonus, profit sharing, etc.), and state whether the borrower remains eligible and whether the program is expected to continue. If the VOE does not provide sufficient detail, the lender may require a separate employer letter or a copy of the bonus plan or employment agreement that describes the compensation structure.

Declining Bonus Trends

If bonus income has declined year over year, the lender applies the same declining income analysis used for other variable income types. The underwriter compares the two years and, if the trend is downward, will typically use the lower year’s figure rather than the average. For example, if bonuses were $30,000 in 2024 and $20,000 in 2025, the lender may use $20,000/year ($1,667/month) rather than the average of $25,000/year ($2,083/month). The borrower may provide a letter of explanation if the decline was due to a specific, non-recurring factor (such as a company-wide reduction in the bonus pool due to a one-time event), but the lender retains discretion to use the lower figure. If the current year’s bonus has already been paid and represents a recovery (e.g., $28,000 in 2026), the lender may reconsider the trend with three data points, but this treatment varies by lender.

Special Considerations for Stock-Based and Deferred Bonuses

Many employers, particularly in the technology and financial services sectors, pay bonuses partly or entirely in restricted stock units (RSUs), stock options, or deferred compensation. These forms of compensation present challenges for mortgage qualification because they are not liquid cash at the time of receipt, may be subject to vesting schedules, and carry market risk. Most lenders do not include unvested RSUs or stock options in qualifying income. However, if the borrower has a documented history of receiving and liquidating RSU or stock grants over a two-year period, and the grants are reported as income on W-2 forms and tax returns, some lenders will consider the historical pattern for averaging purposes. The borrower must demonstrate that the vesting and sale of stock compensation is a consistent, ongoing component of their earnings, not a one-time windfall.

Related topics include variable income averaging (overtime, bonus, commission), commission income mortgage guidelines, overtime income mortgage guidelines, debt-to-income ratio explained (dti), asset and reserve requirements explained, and common income mistakes that cause mortgage denials.

Key Factors

Factors relevant to Bonus Income Mortgage Guidelines
Factor Description Typical Range
Bonus Frequency How often the bonus is paid (annually, quarterly, semi-annually) and whether it has been paid consistently Annual bonuses with 2+ consecutive years of receipt are the standard; less frequent patterns may not qualify
Bonus Consistency Whether the bonus amounts are reasonably consistent year over year or fluctuate significantly Stable or moderately fluctuating amounts are preferred; wide swings require additional explanation
Percentage of Total Income The proportion of total compensation represented by the bonus component Bonuses under 25% of total income receive standard treatment; higher percentages receive additional scrutiny
Employer Bonus Policy Whether the employer's bonus program is structured and documented or purely discretionary Structured programs with written policies are viewed more favorably than purely discretionary bonuses
Bonus Type (Cash vs. Equity) Whether the bonus is paid in cash or in stock-based compensation such as RSUs or options Cash bonuses are straightforward; stock-based bonuses require additional documentation and may not qualify

Examples

Consistent Annual Performance Bonus

Scenario: A corporate finance director has received an annual performance bonus every February for the past five years. The most recent two years: $22,000 (paid February 2025 for 2024 performance) and $24,500 (paid February 2026 for 2025 performance). Her base salary is $140,000. The lender averages the two-year bonus: ($22,000 + $24,500) / 24 = $1,937.50/month.
Outcome: Total qualifying income is $11,667 base + $1,937.50 bonus = $13,604.50/month. The employer's VOE confirms the annual performance bonus program is ongoing and the borrower remains eligible. The stable, slightly increasing trend supports use of the full average.

One-Time Signing Bonus Excluded

Scenario: A marketing executive received a $35,000 signing bonus when starting a new position 14 months ago. She also received a $12,000 annual performance bonus after her first year. The borrower wants both bonuses included in qualifying income.
Outcome: The $35,000 signing bonus is excluded because it is a non-recurring payment. The $12,000 performance bonus has only one year of history, which is insufficient for the two-year averaging requirement. The borrower qualifies on base salary only. If she waits until she has received two annual performance bonuses, that income can be added to her qualification.

Declining Bonus with Employer Explanation

Scenario: An operations manager received a $40,000 bonus in 2024 and a $25,000 bonus in 2025, a decline of 37.5%. The employer provides a letter explaining that the 2025 bonus pool was reduced company-wide due to a one-time restructuring charge, and that the 2026 bonus pool has been restored to normal levels. The borrower's year-to-date indicators suggest a 2026 bonus in the range of $35,000-$42,000.
Outcome: Despite the employer's explanation, the lender uses the 2025 figure ($25,000/year or $2,083/month) rather than the two-year average ($2,708/month) because the decline exceeds the threshold for straight averaging. If the 2026 bonus is paid before closing and reflects a recovery, the lender may reconsider using a revised average with three data points.

Common Mistakes to Avoid

  • Counting a signing bonus or one-time award as recurring income

    Signing bonuses, retention payments, and project-completion awards are non-recurring by nature. Including them in the income calculation creates an inflated qualifying figure that the lender will reject upon reviewing the documentation. Only bonuses with a pattern of recurrence qualify.

  • Not providing employer documentation of the bonus program structure

    Without employer verification that the bonus is part of an ongoing program and that the borrower is eligible, the lender cannot confirm likelihood of continuance. A bonus that appears on a pay stub but lacks employer confirmation may be excluded from qualifying income.

  • Expecting the lender to use the highest bonus year for qualification

    Lenders use the two-year average or the lower year (in cases of decline), not the highest year. Borrowers who qualify based on their best bonus year will find that the averaging methodology produces a lower monthly income figure.

  • Failing to account for the timing difference between performance year and payment year

    Bonuses are often paid in the first quarter for the prior year's performance. If a borrower's W-2 for 2025 includes a bonus paid in January 2025 for 2024 performance, the lender must correctly attribute the bonus to the right period. Misattribution can distort the trend analysis.

Documents You May Need

  • Most recent 2 years of W-2 forms
  • Most recent 2 years of federal tax returns
  • Most recent 30 days of pay stubs with year-to-date bonus income shown
  • Written Verification of Employment (VOE) with bonus amounts by year
  • Employer letter describing the bonus program structure and confirming borrower eligibility
  • Employment contract or offer letter detailing bonus terms (if available)
  • Prior year-end pay stub showing bonus payment (if current-year stub does not itemize)

Frequently Asked Questions

Can a discretionary bonus qualify if it has been paid consistently?
Yes. Even if the employer describes the bonus as discretionary, a pattern of consistent annual payments over two or more years combined with employer verification of the borrower's continued eligibility can establish the income for qualification purposes. The key is the documented pattern of receipt, not the label the employer gives the bonus.
How do lenders handle bonuses paid in stock or RSUs?
Most lenders do not include unvested stock or RSUs in qualifying income. If the borrower has a two-year history of receiving and liquidating stock-based bonuses, and the income is reported on W-2s and tax returns, some lenders may average the historical amounts. However, this treatment varies significantly by lender, and borrowers should discuss stock compensation with their loan officer early in the process.
What if my bonus is paid quarterly instead of annually?
Quarterly bonuses are acceptable provided the borrower has a two-year history of receipt. The lender sums all quarterly payments for each of the two prior years and averages the annual totals over 24 months. Quarterly payment schedules can actually provide a more granular data set for trend analysis.
Does a mid-year job change affect bonus income qualification?
If the borrower changed jobs mid-year, the bonus income from the prior employer ends at the separation date. Any bonus from the new employer would need its own history, which may be insufficient if the borrower is still in the first year. The borrower may need to qualify without bonus income until a pattern is established at the new employer.
Are profit-sharing distributions treated the same as bonuses?
Profit-sharing distributions paid through an employer's payroll and reported on the W-2 are generally treated similarly to bonus income for qualification purposes. The same two-year averaging and documentation requirements apply. Profit-sharing from a business the borrower owns may be treated differently, depending on the business structure and how the income is reported on tax returns.
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