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!  🙂

2009 $8,000 "1st time" buyer credit

IMPORTANT UPDATE!  Bill signed on 2/17/2009.

Original post below:

Back in October, I wrote this post about the repayment feature of the 2008 $7,500 1st time buyer “credit”, including this link to more information as to who qualifies, and the terms of the “credit”.

Yesterday on Twitter I noticed Ryan Hukill’s post referencing Kenneth Harney’s article suggesting that:

“… Congress might be on the verge of transforming it into a true tax credit — one that never has to be paid back…” for purchases made on or after 1/1/2009.

I personally don’t see how changing the repayment terms for people who bought houses last year can be part of a “stimulus” package.   Posting this so that people who are eligible for the credit are aware that there may be a change in the repayment feature. (update: Apparently Obama agreed with me, as there does not appear to be a change in the repayment feature for homes bought from 4/9/08 through 12/31/08 and the 2008 $7,500 Loan/Credit.)

Do the Banks Own Seattle?

[photopress:bank.jpg,full,alignright] The photo is of the Bank I worked in for twenty years. Lots of memories in there and lots of pranks pulled up on that balcony 🙂

I was perusing The Tim’s blog while writing something on my blog earlier today, and ran into the comments regarding King County median income and median home prices, again. I never seem to draw the same conclusions as other people. So I tested my thinking on the subject. From my way of thinking, at least SOME of the people have SOME money to put down when they purchase a house. So the median income is relative to the median mortgage used in the purchase, not the sale price. Isn’t it? So I calculated some random stats you might find interesting to prove that the Banks and Mortgage Companies don’t TOTALLY finance EVERY home purchase.

First I went to the high end and found that Seattle high end homes were financed at only 36% of value. That includes 40% of the randomly chosen properties sold in the last 3 or 4 months that were bought with cash and no mortgage at all. Mercer Island and high end Eastside, like Clyde Hill and Medina, financed at a higher rate of 49.5%. Both represented about $28 million dollars worth of homes purchased. Seattle financed $9,750,000 of their $28,000,000 purchase prices while Mercer Island, Clyde Hill and Medina financed $13,500,000 of their $28,000,000. Still plenty of equity though, so NO, the banks do not own the McMansions 🙂

One thing I found that was surprising to me up in the high end is that one of the most expensive homes sold was sold all cash…not surprising. The occupant at the time of sale was a tenant! That cracked me up. Why would someone rent a Six Million Dollar house? Oh, well…just a random observation.

Then a went down to the $475,000 to $500,000 price range, more in the median range and pulled through separate market segments. South Seattle was 90% financed. North Seattle was 85% financed and Eastside was only 70% financed. Why would the Eastside have more people with more money to put down on their homes? Easy. Cheap condos. The condo market was really cheap two to three years ago, and is still relatively cheap by Seattle standards. So people who bought those instead of renting 3 to 5 years ago had built up enough equity to put an average of 30% down on their single family home purchases.

Just random stats that I found interesting. The banks own 90% of South Seattle, 85% of North Seattle, 70% of Eastside and only 35%-50% of the most expensive homes. At least the ones that everyone who is reading King County median income/median home price stats are talking about, those bought recently.