Mortgage Income Calculations are not hard they are just unique. They are as unique as the applicant’s line of work, and method of compensation.
After reading various mortgage articles with questions and answers about the loan process and how income is calculated; it seems only appropriate to generate an article easy to understand. Having been a mortgage underwriter I am laying out these calculations so you may how an underwriter evaluates your income.
Income Calculation
A well-trained loan officer will tell their clients to bring a minimum of the following with them to the application:
- pay stubs to cover one month for each borrower
- two years W-2’s, and
- self-employed, tax returns for the previous two years will all schedules *self-employed income is addressed here
There may be other income documentation based upon your income type.
When the loan is entered into the automated underwriting system. The income will be more accurate based upon the documentation, and not just the applicant’s recollection of their earnings.
The type of income must be entered per the following: regular base income, commissions, and bonus
(normally used if consistent only), overtime (must be consistent), self-employment income, tip income (an average of the latter two), alimony, and child support to name a few. If you have alimony, the divorce decree may be applicable as well as tax returns.
The underwriter is looking for a consistent, stable income, that an individual is earning on a regular basis, and if it will continue for at least 3 years. Most other income is averaged.
If the income is not regular income, such as commission, bonus, and tips, it will be averaged to give it a rounded value of contribution as these incomes usually fluctuate. The number of months used for other income that is not regular may sometimes be based upon what the automated underwriting system designates.
The documentation (pay stubs, W-2’s and tax returns if applicable) is reviewed to see if you receive monthly payroll, weekly, bi-weekly, semi-monthly, or hourly wages, which is calculated by determining how many regular hours is worked weekly. The lender of choice may under certain circumstances, obtain a VOE (verification of employment) directly from the employer if there are any discrepancies, other income, or change of employment within the past two years.
Mortgage income evaluations are based upon consistent receipt of the income, the probability of continuation, and if the client has the ability for the continued income stream; (education, experience, etc.). Gross income is used to qualify for a mortgage loan, except gross income from a business such as a schedule C income, or any self-employment income, other than W-2 income.
Note: Self-employment income calculations are not fully covered in the article
Sample Calculations for Salaried Income
- a)
Annual Wages: $46,000 ÷ 12 = $3,833. (Rounded) monthly wage - b)
Weekly: $46000 ÷ 52 = $884.62 x 52 ÷ 12 = $3,833 (rounded) monthly wages
Calculations for Hourly Income: *note, in this case, there is not an
hourly rate as it is an annual salary. I will use a figure that is even.
$46000 ÷ 2080 hrs. (yearly hrs. worked for a 40 hr. week) = $22.12.
For this purpose, I am going to use an even hourly rate of $22.00 to show you the calculation of an
hourly rate job.
$22.00 x 40 hrs. x 52 ÷ 12 = $3813.33 or $45,760 (rounded) annual
c) Bi-Weekly Calculation: * the bi-weekly
salary is on the pay stub and using the
$45760 ÷ 26 pay periods = $1760
$1760 x 26 ÷ 12 =$3813.33
d) Semi-Monthly Calculation: *the amount will
be on the pay stub
$45,760 ÷ 24 = $1906.67 rounded or
$1906.67 x 24 ÷ 12 = $3813.33
The underwriter must often determine how an individual is paid according to the dates and year-to-date earnings on the pay stub and previous years W-2. Many people seem to think that because they have two (2) paychecks monthly that it is automatically bi-monthly income. This makes the calculation of their true income off. It can be bi-weekly as two additional paychecks yearly are obtained with a bi-weekly salary.
Commission Income:
Calculation of commission income is normally a 24-month average but not less than 12 months if there is a history of commission income, and it has been received continually and is likely to continue in the future. This is received from the employer. Certain circumstance as always comes into play and therefore it may be calculated differently. **If it is guaranteed and is documented as the same amount each month, or normal for the employer it would be counted regardless, but usually commission income fluctuates and therefore must be averaged.
Example: Year-to-date income is counted for the months, which have lapsed: *this example is part-time commissions. The full-time commission would be calculated the same way.
January – $2500, February $2800, March $1200 etc. = 6500 year to date earnings
2018 total commission = $5000
2017 total commission = $2500
$14000 ÷ 27 = $519 rounded
In some instances, if there is, a significant reason to believe the year-to-date income increase is stable and will continue in the near future, 15 months of commission income may be used. This increase could be due to company changes, more clientele, or more territory, but it must be justified and evidence from the employer verified. It may depend upon other areas of the financial file and if the AUS system does not require a full two years calculation. The lower year could also be due to being a new hire. Sometimes it will depend upon the underwriter’s judgment, the risk factors, and the overall review of the file.
Bonus Income:
Bonus income is calculated on an average just like commission income and evidence of anything contrary to the normal must be proven and documented by the employer. A 24-month history is not less than 12 months but must be consistent and likely to continue. It sometimes depends upon whether the job is one with a history of bonus income and less time may be applicable if the bonus is guaranteed etc. Different circumstances could apply but this is the norm.
These are the general/basic rules for mortgage income calculations for mortgage lending for manually underwritten mortgage loans. When loans are entered into automated underwriting systems, very often the documentation may be fewer years used to calculate the income. This depends upon the overall stability of the loan. It could be that the most recent pay stub and W-2 be the requirement, making it a prior year plus year-to-date average.
