Can stipend income be used to qualify for a mortgage?

Erik J. Martin
Erik J. Martin
The Mortgage Reports Contributor
June 8, 2021 - 7 min read

Does stipend income count for a mortgage?

When applying for a mortgage loan, borrowers need to demonstrate sufficient income to show they can pay the loan back.

But not every borrower earns a traditional salary or hourly wage. Some borrowers receive stipend income payments from a company, school, or organization.

Lenders typically don’t count stipend income toward a mortgage because it’s only temporary. But if your stipend income will continue long-term, it might help you qualify.

Here’s what you should know if you earn stipend income and you’re hoping to buy a house or refinance.

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Stipend income and mortgages

Typically, lenders will not consider short-term stipend income for mortgage applications because the income is only temporary.

“However, long-term stipend income may be considered by lenders to help you qualify for financing,” says Rocky Foroutan, CEO of LenderHomePage.

“For a Fannie Mae-backed loan, for example, Fannie Mae requires documentation of income received for the most recent 12 months and proof that will continue for at least three more years for stipend income to count on an application.”

Joe Pirro, CEO and founder of Sovereign Lending Group, agrees.

Stipend income may help you qualify for a mortgage if it will continue for at least three years.

“If you can provide documentation to validate that you have continual monthly stipend payments that will persist for at least three years, you could use your stipend to help qualify for a mortgage loan, if the lender allows it,” he notes.

General living stipends can be used to possibly qualify for a mortgage loan with certain loan providers.

“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,” Foroutan continues.

“However,” he cautions, “only a few lenders accept this form of income for loan applications.”

Stipend income explained

If you hope to get a mortgage loan as a stipend earner, it’s important to understand what lenders consider to be stipend income.

Stipend income is a form of payment given or awarded by a business, institution, or other organization for providing a service or maintaining a particular status — such as being a student at a college or an intern working for a company.

This income does not represent earned wages; it is separate from salary and designed to help ease the recipient’s financial burden. For example, a housing allowance is a type of stipend.

“Employers will sometimes provide stipends for things like additional education, travel, room and board, food, and health insurance,” explains Foroutan.

“The key to understanding a stipend is that it is a form of payment usually in exchange for providing a service of some kind. Commonly, a stipend is given to anyone who is not eligible for a salary but who needs money to cover living expenses. That’s why the most common stipend recipients are interns, fellows, clergy, apprentices, public servants, graduate assistants, and medical students.”

Pirro adds that a stipend is often given in a fixed amount of payment each month and is usually considered taxable income.

“Pensions, disability benefits, retirement account withdrawals, child support, and alimony are not considered stipend income,” says Pirro.

“Instead, these are classified as unearned income that can be weighed as compensating factors that can help you qualify for a mortgage loan.”

How stipend income can help you qualify

Remember that lenders don’t look at income alone when deciding whether to approve you for a mortgage loan.

Instead, they look at income in relation to your monthly debts. This is known as your ‘debt-to-income ratio’ or ‘DTI.’

Brian Martucci, finance editor for Money Crashers, says stipend income generally cannot be added to the amount of income lenders consider when calculating your debt-to-income (DTI) ratio and determining whether to approve your mortgage application.

Most loan programs have a strict DTI ratio threshold that does not allow you to exceed 43 percent. The more income you earn, the larger mortgage you can qualify for based on your DTI.

Stipend income won’t be counted directly as income, and thus won’t decrease your debt ratio.

“But,” says Martucci, “it can be used as a compensating factor that, in practice, may increase your chances of qualifying for the loan.”

Understanding compensating factors

“Compensating factors are adjustments that lenders can make to a loan application to make a borrower appear more favorable based on their financial history,” Foroutan says.

In other words, they’re financial strengths that make up for any weaknesses on a mortgage application.

Stipend income can be used as a compensating factor that may, in practice, increase you chances of qualifying for the loan.

There are several different types of compensating factors that can help you qualify for a home loan.

For example, if you have savings ('cash reserves’) equal to 3-6 monthly mortgage payments plus other housing expenses, your lender may be able to allow a higher DTI.

Other compensating factors include rent and consistent payment history, additional income like bonuses or overtime, residual income, and long-term stipend income.

Stipend income as a compensating factor

“Stipend income can also be marked as a compensating factor, allowing your lender to stretch your DTI ratio a bit to make accommodations,” says Foroutan.

“But using stipend income as a compensating factor can only go so far. If you have weak credit, a poor repayment history, or really high debt, something like a stipend will not improve your borrower eligibility or lower your interest rate.”

In order to get the best deal possible, you’ll want to strengthen your application in other areas.

This could include increasing your credit score, saving for a bigger down payment, or paying down existing debts like credit cards or student loans.

Of course, it’s hard to do all those things at once. But pick the areas where you can have the most impact. Improving your personal finances even a little can go a long way when it comes to loan approval.

Types of income that can be used to qualify for a mortgage

Since stipend income only counts as a compensating factor for mortgage qualifying, you’ll need a primary source of income to be eligible for the loan.

That doesn’t mean you need a traditional W-2 job, though. Many different income types can be counted on a mortgage application

These include:

“Stipend income is one of the few types of recurring income that usually cannot be used to qualify for a mortgage loan unless it is a continuous, long-term type of stipend,” Martucci cautions.

“Windfall income, such as gambling or lottery winnings, is another broader category of income that mortgage lenders won’t consider unless it is shown to recur.”

If you’re not sure whether your income counts for a home loan, talk to a lender or mortgage broker.

Your loan officer will look at each source of income you earn and determine your mortgage eligibility.

Buying a house with a co-borrower

First-time home buyers who earn stipend income might have a hard time qualifying for a mortgage on their own.

If you’re not eligible for a salary and earn only stipend income, lenders likely won’t be able to approve you.

This is where a co-borrower can come in handy.

Buying with a spouse, family member, or close friend who’s a full-time, salaried worker allows you both to qualify for the loan based on your combined income and credit history.

You could buy a house based on your co-borrowers income, with your own stipend income potentially acting as a compensating factor.

In this case, you and your co-borrower would both be responsible for monthly payments on the home and would share in any equity gains.

Qualifying for a mortgage with nontraditional income

If you are self-employed or a gig worker, you earn nontraditional income. In these instances, you may need to apply for a non-qualified (non-QM) mortgage loan. These types of loans are designed for those with cash assets to buy a home but who don’t have proof of consistent income.

“There are a few things loan officers evaluate to verify income for non-qualified mortgage loans. These include your personal tax returns, business tax returns, and signed business profit and loss statements over the past few years,” says Foroutan. “Lenders may also look closely at your bank statements.”

Overall, prepare to provide validating documentation showing three years of continual nontraditional income as well as compensating factors like healthy reserve savings.

“Documentation is key. You want to be able to show that your income streams are consistent and relatively long-lived, and you may need to prove that you’re obligated to receive this income — including stipend income — in the future,” Martucci adds.

Check your home loan eligibility

Each mortgage borrower is unique. Stipend income may or may not count toward your mortgage loan depending on your financial situation.

Only a mortgage lender can tell you for sure whether you qualify. So if you’re ready to start house hunting, your first step should be to get a home loan pre-approval.

Pre-approval from a mortgage lender will verify your home buying eligibility as well as your budget and mortgage interest rate. If you’re ready to get serious about home buying, you can get started below.

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