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!  :)

About Rhonda Porter

Rhonda Porter is an NMLS Licensed Mortgage Originator MLO121324 for homes located in Washington state. Her blog, The Mortgage Porter, is nationally recognized for sharing relevant information to consumers about mortgages.

She has been originating mortgages since 2000 at Mortgage Master Service Corporation #40445 Consumer NMLS Website: http://www.nmlsconsumeraccess.org/TuringTestPage.aspx?ReturnUrl=/EntityDetails.aspx/COMPANY/40445
NMLS ID 40445. Equal Housing Opportunity.

You can follow Rhonda on @mortgageporter, Facebook and/or Google+

Comments

  1. Yes. Those are the copies borrowers are looking for and never recieved. The loan application. U.S. Code Title 12 Chapter 29 Section 2803 “Maintanence of Records an Public Disclosure” (6)”Retention of Records” Loan application must be filed within 1 year after closing and remain on file three years after that.

  2. Hi Steve, exactly what are you referring to?

  3. I like your article Rhonda.

    I was wondering if you can refer me to a link or document that show the many different ways an underwriter may determine income on both W2 borrowers and Self Employed.

    Please let me know if you can help. Thanks!

  4. I like your article Rhonda.

    I was wondering if you can refer me to a link or document that show the many different ways an underwriter may determine income on both W2 borrowers and Self Employed.

    Please let me know if you can help. Thanks!

  5. Update to this post: borrowers can count on having a 4506 done at application. This means that a tax transcript is going to be pulled to make sure it’s in line with what you’ve disclosed on your application.

  6. DO YOU KNOW WHERE I COULD FIND GUIDELINE TO PROVE OR DISPROVE THE FOLLOWING. I DID NOT KNOW THAT WE WERE TO DEDUCT UNREIMBURSED BUSSINESS EXPENSES FROM A W2 BORROWERS GROSS INCOME. THE DEDUCTION DOES NOT AFFECT HIS ADJUSTABLE GROSS JUST HIS TAXABLE INCOME.

    IF THIS IS A TRUE GUIDE LOOKS LIKE DU/LP/HUD/VA ETC WOULD ALWAYS HAVE REQUIRED TAX RETURNS ON ALL W2 BORROWERS TO VERIFY THEY DIDNT CLAIM THE DEDUCTION.

  7. DO YOU KNOW WHERE I COULD FIND GUIDELINE TO PROVE OR DISPROVE THE FOLLOWING. I DID NOT KNOW THAT WE WERE TO DEDUCT UNREIMBURSED BUSSINESS EXPENSES FROM A W2 BORROWERS GROSS INCOME. THE DEDUCTION DOES NOT AFFECT HIS ADJUSTABLE GROSS JUST HIS TAXABLE INCOME.

    IF THIS IS A TRUE GUIDE LOOKS LIKE DU/LP/HUD/VA ETC WOULD ALWAYS HAVE REQUIRED TAX RETURNS ON ALL W2 BORROWERS TO VERIFY THEY DIDNT CLAIM THE DEDUCTION.

  8. Tracey, it looks like you’re in the mortgage industry. What does your underwriter tell you? If the 4506 reveals significant unreimbursed expenses, it will most likely be added to your application–especially now that the 4506 is pulled AT application.

  9. Dear Rhonda,

    I am trying to research if income of an person working for some international organizations, like The World Bank Group- IMF, IFC, The World Bank can be deternimed from Employment verification letter rather than pay stub for the purposes of mortgage.
    The simple reason is the pay stubb does not show the GROSS INCOME.
    If a person is say a permanent resident and not a citizen, they can be paid their salary NET and not gross in these organizations. In that case their paycheck with show the net amount and can be calculated by roughly adding 30%. Normally organization can provide an employment verification letter stating the Annual Gross Income. Can this be used by underwriter to determine the persons income or is there any regulation by Fannie May or Mac saying it MUST be from the Pay stub?
    Thanks Peter

    • Peter, it may boil down to what the underwriter will accept for documentation. They may still want the paystub along with a letter of explanation from the employer and a verification of employment.

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