Calculating Income of Employed W2 Borrowers for Mortgage Qualifying

Jillayne wrote a post about the upcoming national licensing exam that mortgage originators will have to take and pass (unless they work for a depository institution) due to the SAFE Act.   She provided examples of questions that may be on the exam.  One of them is how to calculate income–which is receiving quite a few comments on her post.

If an applicant works 40 hours every week and is paid $13.52 per hour, what is the applicant’s
monthly income?
(A) $2,163.20
(B) $2,343.47
(C) $2,379.52
(D) $2,487.68

The correct way to calculate this is 13.52 x 40 hours x 52 weeks divided by 12 months = (B) $2,343.47.   The mortgage originator should also review the last two years W2’s to make sure the income is steady or increasing.   If it’s decreasing, this will need to be explained and the income may be averaged or a lower income may be used.   For example, if the borrower recently had their hours cut due to the economy, the new lower figure will most likely be used.   What’s most important is steady hours for the hourly employee…a recent jump in hours may not be considered either.

It’s important that the borrower has a minimum of a two year history in their line of work in order to be able to use the income (secondary education may be able to count towards the two year requirement).   If someone started a second job one year ago as a waitress for supplemental income, it might not meet the criteria to be factored towards income unless the borrower had a second job in the same industry over the past two years.

Overtime and bonus income needs to be received for the past two years to be factored for qualifying as well.   Again, this boils down to stability and trends with income are heavily considered.    

Commission incomes (W2) requires a two year history as well and the income is averaged.  If a borrower’s commission income is more than 25% of their annual income, they’re treated more like a self-employed borrower.  They’ll need to provide their last two years complete tax returns and non-reimbursed business expenses that are claimed on the tax return will be deducted from the gross income (they’re treated more like a self-employed borrower).  A situation that I’ve seen is where a borrower was paid a salary and then received a promotion where they had greater earning potential.   The employer reduced their base and added a commission structure.   Because the commission was a new feature to the income, only new lower base income was used for qualifying.

It all pretty much boils down to showing stability over the past 24 months and recent trends when calculating income.   Also be prepared to complete a Form 4506–even if you’re paid salary–as a measure to prevent fraud.   Lenders may also require a Verification of Employment with your employer to confirm the information provided regarding employment, income is accurate and that employment is likely to continue prior to funding your new mortgage.

There are many other types of income–for purposes of keeping this post short, sweet and simple, I’ve stuck to income that’s reported via a W2 and a “full doc” loan.  

Hopefully you’re working with a Mortgage Professional who reviews your income documentation upfront and calculates it correctly…and I hope you’re quickly providing the information that is being requested so that you’re properly qualified in the beginning of the process.   Nobody likes to get involved with a transaction to find out that the underwriter is not going to use the income that was used on the application because it was figured incorrectly.

Questions?  Ask!  🙂