MortgageLoans.net

Overtime Income Mortgage Guidelines

Overtime income mortgage guidelines are the underwriting standards lenders apply when a borrower's qualifying income includes overtime earnings, requiring a documented history of overtime receipt (typically two years), income averaging, employer verification of overtime availability and likelihood of continuance, and analysis of income trends.

Key Takeaways

  • Lenders require a minimum 12-month history of overtime income, with a 24-month history as the standard for most conventional and agency guidelines .
  • Overtime income is averaged over the documented period (typically 24 months) and added to the borrower's base hourly or salary income for qualification.
  • The employer must verify through a VOE or separate letter that overtime has been available, that the borrower has worked overtime consistently, and that overtime is expected to continue.
  • Declining overtime income is treated conservatively; the lender typically uses the lower year or excludes overtime if the decline is substantial and unexplained.
  • Mandatory overtime programs (where the employer requires a minimum number of overtime hours) are viewed more favorably than voluntary overtime, which depends on the borrower's initiative.
  • Seasonal overtime patterns are acceptable if they recur consistently; the lender averages the full annual overtime amount including off-season months.

How It Works

Documenting Overtime History

The lender establishes overtime income through pay stubs, W-2 forms, and employer verification. The borrower’s most recent 30 days of pay stubs must show overtime hours and overtime pay separately from regular hours and regular pay. If the pay stub does not itemize overtime, the lender cannot determine the overtime component and may require a more detailed earnings statement from the employer. W-2 forms show total compensation but do not break out overtime separately, so the lender relies on the combination of pay stubs, the Verification of Employment (VOE), and potentially the employer’s payroll records to reconstruct the overtime history. The VOE should include overtime earnings for each of the past two calendar years and year-to-date, along with the average number of overtime hours worked per pay period or per year.

The Averaging Calculation

Overtime income is averaged over the same two-year period used for other variable income. The lender totals overtime earnings from the two most recent calendar years, divides by 24, and arrives at a monthly overtime income figure. If the borrower has year-to-date overtime data covering several months of the current year, the lender may incorporate this into the calculation. For example, a police officer who earned $14,000 in overtime in 2024 and $16,000 in 2025 has a two-year average of $1,250/month. If year-to-date overtime through May 2026 is $7,500 (annualizing to $18,000), the lender sees a stable to increasing trend and uses the $1,250/month average. If the year-to-date figure annualizes below the prior two-year average, the lender must assess whether the decline is meaningful.

Employer Verification of Continuance

The employer’s confirmation of overtime availability is a critical component. The VOE or a separate employer letter must address whether overtime is expected to continue, whether the borrower’s position is eligible for overtime, and whether there are any known changes to staffing, scheduling, or operational needs that would reduce overtime opportunities. Some lenders require the employer to state whether overtime is mandatory or voluntary. Mandatory overtime, where the employer requires employees to work beyond the standard schedule, provides stronger assurance of continuance than voluntary overtime. However, voluntary overtime with a documented multi-year history of consistent hours is also generally acceptable. If the employer states that overtime is being reduced or eliminated due to budget cuts, hiring of additional staff, or operational changes, the lender may reduce or exclude overtime from the qualifying calculation.

Declining Overtime and Trend Analysis

When overtime earnings decline year over year, the underwriter must determine whether the decline is a temporary fluctuation or a structural reduction. Common causes of overtime decline include employer hiring additional staff (reducing per-employee overtime availability), seasonal or cyclical downturns, policy changes limiting overtime hours, or the borrower voluntarily reducing overtime hours. If the decline is more than nominal (commonly interpreted as greater than 20-25% year over year, though no universal threshold exists ), the lender will typically use the lower year’s overtime figure rather than the two-year average. In cases of severe decline (e.g., overtime dropping by 50% or more), the lender may exclude overtime income entirely unless the borrower provides compelling evidence that the decline is temporary and overtime will resume at historical levels.

Seasonal and Cyclical Overtime Patterns

Many industries have predictable seasonal overtime patterns. Retail workers may earn significant overtime during the holiday season, construction workers during summer months, and tax professionals during filing season. Lenders recognize seasonal patterns and do not penalize borrowers for having overtime concentrated in certain months, provided the annual totals are consistent from year to year. The averaging methodology naturally accounts for seasonality because it uses annual totals divided by 12 months (or 24 months for the two-year average), smoothing the seasonal peaks and valleys into a stable monthly figure. The borrower’s pay stubs during the off-season may show zero overtime; this is acceptable as long as the overall annual pattern is documented and recurring.

Related topics include variable income averaging (overtime, bonus, commission), commission income mortgage guidelines, bonus 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 Overtime Income Mortgage Guidelines
Factor Description Typical Range
Overtime History Length The number of years the borrower has consistently earned overtime income in the current position 12-month minimum; 24-month history is the standard for full qualification
Employer Confirmation of Continuance Whether the employer verifies that overtime is expected to remain available and that the borrower's position is eligible Required for all overtime income; employer must address future availability
Overtime Trend (Year-Over-Year) Whether overtime earnings are stable, increasing, or declining compared to prior years Stable or increasing: full average used. Declining: lower year or exclusion depending on severity
Percentage of Total Income How much of the borrower's total compensation is derived from overtime versus base wages Overtime up to 20-30% of total income is common; higher percentages receive additional scrutiny
Mandatory vs. Voluntary Overtime Whether overtime is required by the employer or available at the borrower's discretion Mandatory overtime provides stronger continuance support; voluntary overtime requires documented pattern of consistent receipt
Seasonal Pattern Whether overtime is concentrated in certain months or distributed throughout the year Seasonal patterns are acceptable if annual totals are consistent; averaging smooths monthly variations

Examples

Consistent Overtime for a Registered Nurse

Scenario: A hospital nurse has worked regular overtime for four years. Her overtime earnings were $12,800 in 2024 and $13,500 in 2025. Year-to-date through April 2026, she has earned $4,800 in overtime (annualizing to $14,400). Her base hourly rate produces annual regular wages of $68,000. The lender calculates the two-year overtime average: ($12,800 + $13,500) / 24 = $1,096/month.
Outcome: The employer's VOE confirms that the hospital unit regularly has overtime available due to staffing needs and that overtime is expected to continue. Total qualifying income is $5,667 base + $1,096 overtime = $6,763/month. The stable, slightly increasing overtime trend supports full use of the two-year average.

Declining Overtime Due to New Hires

Scenario: A warehouse supervisor earned $22,000 in overtime in 2024 and $11,500 in 2025, a decline of nearly 48%. The employer confirms that additional supervisors were hired in mid-2025, reducing the overtime available to each individual. The employer states that overtime is still available but at reduced levels. Year-to-date overtime through March 2026 is $2,400 (annualizing to $9,600).
Outcome: Due to the substantial decline and the structural reason (additional hires), the lender excludes the 2024 overtime figure and uses the 2025 amount ($11,500/year or $958/month) as the qualifying overtime income. Some lenders may use the even lower annualized 2026 figure or exclude overtime entirely given the continued downward trajectory. The borrower's qualifying income and maximum loan amount are recalculated accordingly.

Seasonal Overtime in Construction

Scenario: A construction foreman earns most of his overtime from April through October each year. His overtime was $19,000 in 2024 and $20,500 in 2025. During November through March, he earns minimal overtime (typically $500-$1,000 total). He applies for a mortgage in January 2026, and his current pay stubs show very low overtime for the season.
Outcome: The lender recognizes the seasonal pattern and uses the two-year annual average: ($19,000 + $20,500) / 24 = $1,646/month. The low overtime on the current pay stub does not negatively impact the calculation because the lender is using the annualized two-year average, which accounts for the seasonal nature of the work. The employer confirms the seasonal overtime pattern and that it is expected to continue.

Common Mistakes to Avoid

  • Assuming overtime will automatically qualify without employer verification

    Even if pay stubs clearly show overtime earnings, the lender requires the employer to verify that overtime is expected to continue. Without employer confirmation, overtime income may be excluded from the qualifying calculation regardless of how consistent the history appears.

  • Applying for a mortgage during a low-overtime period and expecting lenders to use peak earnings

    While lenders do average overtime over the full year (which smooths seasonal variations), applying during a period when year-to-date overtime is low may raise questions if the annualized current-year figure is significantly below prior years. Providing context about seasonal patterns upfront can help the underwriter correctly evaluate the income.

  • Not disclosing employer changes that affect overtime availability

    If the employer has recently changed overtime policies, hired additional staff, or otherwise reduced overtime opportunities, this information will surface during verification. Borrowers who fail to disclose these changes may face last-minute income reductions during underwriting, potentially jeopardizing the loan.

  • Confusing overtime pay rate with overtime income for averaging purposes

    Overtime is typically paid at 1.5 times the regular hourly rate, but the averaging calculation uses total overtime dollars earned, not hours worked multiplied by a rate. Borrowers sometimes estimate their overtime income incorrectly by using the wrong rate or not accounting for actual hours worked.

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 showing overtime hours and overtime pay separately
  • Written Verification of Employment (VOE) with overtime earnings breakdown by year
  • Employer letter confirming overtime availability and likelihood of continuance
  • Year-to-date earnings statement with overtime detail (if not shown on pay stubs)
  • Prior year-end pay stub showing total overtime earnings (if available)
  • Letter of explanation for any year-over-year decline in overtime earnings

Frequently Asked Questions

How many hours of overtime do I need to work to qualify?
There is no minimum number of overtime hours required. Lenders evaluate overtime based on the dollar amount earned, the consistency of receipt over time, and the expectation of continuance. Whether the borrower works 5 hours or 20 hours of overtime per week, the qualifying methodology is the same: average the overtime earnings over the documented period.
Can I use overtime from a second job to qualify?
Overtime earned at a second job can be included if the borrower has a documented two-year history of working the second job and earning overtime there. The lender will verify the second job separately and assess whether the borrower can sustain both positions long-term. The overtime from the second job is averaged using the same methodology applied to primary employment overtime.
What if my employer cannot guarantee overtime will continue?
Employers are not required to guarantee overtime; they must state whether overtime is expected to continue based on current operational needs. A statement that overtime is available and has historically been worked by employees in the borrower's position is generally sufficient. If the employer explicitly states that overtime is being reduced or eliminated, the income will likely be reduced or excluded.
Does comp time (compensatory time off) count the same as overtime pay?
Compensatory time off taken in lieu of overtime pay does not generate income and therefore cannot be included in the qualifying calculation. Only overtime that is paid as additional compensation appears on pay stubs and W-2s and qualifies for averaging. If the borrower has the option to receive comp time or overtime pay, only the periods where they chose overtime pay contribute to the income average.
Can I start working more overtime before my mortgage application to increase my qualifying income?
Increasing overtime shortly before an application will have minimal impact on the two-year average. The lender uses the historical average, not the most recent pay period. A sudden spike in overtime in the months before application may actually raise underwriter questions about sustainability. The most effective approach is to document consistent overtime over a 24-month period.
Is there a limit to how much overtime income lenders will count?
There is no absolute dollar cap on overtime income, but lenders evaluate reasonableness. If overtime constitutes a very large percentage of total income (for example, exceeding 40-50% of base pay), the underwriter will scrutinize the sustainability more closely and may require additional employer documentation confirming that the level of overtime is typical for the position and expected to continue .
Last updated: Reviewed by:

Related Topics