When applying for a loan, the lender will consider several factors in whether you qualify. The largest factors are your DTI (debt to income) ratio, and your credit score. Your credit score is created by a variety of factors that show your trustworthiness as a borrower, whereas your DTI is a formula that compares what you earn to what you owe. Stipend income can be considered a “compensating factor” and can help offset negatives such as bad credit or low income.
Not everyone has a standard income source, though. Some who are training for their profession, a student, or work in particular industries will receive a stipend, which is different from standard income. Here we will discuss the role of a stipend in the qualification process for a mortgage.
What Is Stipend Income?
A stipend is a predetermined amount of money prepaid to certain individuals, such as trainees, interns, and students, to help offset some of their expenses. Stipends are often provided to people who are ineligible to receive a regular salary in exchange for the duties they perform. It is not a salary or living wage like one would pay to an employee.
There are some industries where stipends may resemble income due to their longevity, but these stipends are not usually counted in DTI. Pensions, disability benefits, retirement account withdrawals, child support, and alimony are not considered stipend income.
Short-Term Stipend Income in Qualification
Short-term stipends are temporary payments to an individual for a season of time, usually less than four years. These kinds of stipends are considered taxable income by the government, but they aren’t viewed as income by lenders. While this stipend can’t alter your DTI ratio, it can be helpful as a compensating factor for a loan.
A compensating factor is a positive aspect of a borrower’s loan application that can help offset negatives such as bad credit or low income. These factors are anything that can make you more attractive to a lender and improve your ability to make the mortgage payments.
If you’re an intern or student, the stipend you receive will likely fall into this category of a compensating factor. However, some stipends may be considered as a more substantial part of the loan application.
Long-Term Stipends in Qualification
Not all stipends are equal. For example, “those in the health care industry are often given a living stipend that could be deemed reliable and substantial enough to be considered on a loan application. And members of the clergy or those in the charity or non-for-profit industry also receive living stipends of this nature, as they are classified as public benevolent institutions,” says Rocky Foroutan, CEO of LenderHomePage.
Fannie Mae backed-loans may consider stipend income, but there must be documentation that has been received for the last 12 months and will continue for the following three years. In cases of long-term stipends, it is the lender’s discretion as to whether it will be allowed, but they will have the standards of longevity and predictability. Lenders who allow for it are considered rare.
The Bottom Line
The home-buying process is full of questions, especially when you have an income source that isn’t traditional. We would like to help you reach your goal of owning a home with our experience and resources. If you’d like to learn more, reach out to us at (877) 699-0353.