Mortgage Loan Income Calculations
86What the Underwriter Reviews
Since I have been a Mortgage Loan Underwriter for a long time, Conventional, FHA and VA, I feel it is appropriate to enlighten you about what and how an underwriter looks at and how he/she calculates income to give you some idea of just how income is evaluated. I will pick up with self-employed income in another article.
There are of course times when various methods may be used by an underwriters for a specific situation with special circumstances. There are always exceptions in any rule or method but there are certain methods and standards used to calculate income as any other profession has rules and standards. It is based upon consistency, stability, prior history and the ability for future income at the same or greater level.
As I have explained in other articles, the agencies (FHA, FNMA, FHLMC, and VA) all are consistent in allowing their loans to be entered into an AUS, (automated underwriting system). Sometimes the loans are manually underwritten if AUS indicates a discrepancy and it is warranted. This AUS spits out the needed documentation to evaluate the loan, the underwriter of course must pick up on anything that would require additional documentation than what the finding call for. A smart Loan Officer usually will tell their clients to bring with them pay stubs to cover one month and two years W-2s. Therefore when the loan is entered the income is pretty much like it should be. Update: I do not want anyone to be confused....*** Please note that FHA, FNMA, FHLMC and VA, do not make the actual loan, the banks and mortgage companies make the physical loan and use the regulations and guidelines from FHA, FANNIE etc., and sell the loans to them in pools. FHA and VA which are government enities which only insure a portion of the loan
The type income must be entered as it is for instance; regular base income, commissions, bonus (normally used if consistent only) overtime (must be consistent) self employment income, tip income (must use an average) and alimony and child support to name some.
First of all the underwriter is looking for consistent, stable income as stated above. What an individual is earning on a regular or normal basis each and every month. Any other income is averaged that is not regular income but must have been received previously. One month of bonus income is not sufficient nor is one month of commission income.
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. Gross income is used to qualify for a mortgage loan.
Calculator Used in Mortgage Lending
Salaried Income
Sample Calculations for Salaried Income
a) Annual Wages: $46,000 ÷ 12 = $3,833.00 monthly wage
b) Weekly: $884.62 x 52 ÷ 12 = $3,833 monthly wages
Hourly: *note in this case I do not have the hourly rate as it is an annual salary. I will use a figure that is even. But, if I were to use the $46000 ÷ 2080 hrs (yearly hrs worked for a 40 hr week) = $22.12 rounded.
For this purpose I am going to use an even hourly rate of $22.00 to show you the calculation.
$22.00 x 40 hrs x 52 ÷ 12 = $3813.33 or $45,760 annual
c) Bi-Weekly: * the bi-weekly salary is on the pay stub and using the $45, 760 ÷ 26 pay periods = $1760.00
$1760 x 26 ÷ 12 =$3813.33
d) Semi-Monthly: *the amount will be on the pay stub
$45, 760 ÷ 24 = $1906.67 rounded or
$1906.67 x 24 ÷ 12 = $3813.33
Sometimes the underwriter must determine how an individual is paid according to the dates on the pay stub. Why? A lot of time people seem to think because they have two (2) pay checks monthly that it is automatically bi-monthly, it can be bi-weekly as two additional pay checks yearly are received with bi-weekly salary.
Sample Pay Stubs
Commission Income and Bonus
Commission Income:
Calculation of commission income is normally a 24 month average but not less than 12 months if it has been received continually and is likely to continue in the future. This is obtained 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, and normal for the employer to pay guaranteed commission; it would be counted regardless. Usually, commission income fluctuates and therefore must be averaged.
Example: January - $1546, February $1200, March $250 etc. with
2009 total commission = $5000
2008 total commission = $2500
$7500 ÷ 24 = $312.50
If the income years were reversed and $2500 was the commission for 2009, most underwriters will go with the current lower level of $208.33 monthly. This is showing that the level of commission has changed for some reason and is not consistent with the previous year and therefore the most conservative approach was used. As always other factors may come into play also.
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 from the employer. A 24 month history 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 circumstance could apply but this is the norm.
Waitress
Tip and Other Income
Tip Income
Tip income is usually averaged for 12 to 24 months as well and may be less if the applicant has a history of tip income. Tax Returns are obtained for tip income to make sure this income has been disclosed to the IRS. A waitress, bar tender etc. It will depend upon AUS findings as well and the underwriter will determine the best approach of calculating. Tip income is also normally on the computer generated pay stub as tips and the pay stub will show the base hourly salary as well.
Alimony Income
A history of Alimony is also required with a copy of the divorce decree, tax returns and bank statements to see that it has been received on a continual basis and the income must have been received for the past 6 to 12 months to be considered as stable and provided it does not represent more than 30% of the income used to qualify for the loan and continue for the next 12 months. It must be proven it is received; not only that is has been awarded. This will fluctuate depending upon AUS findings as well and other factors.
Child Support
Child Support is looked at the same as alimony and to be considered as stable ongoing income which should have been received for the prior 6 to 12 months. The award document; divorce decree plus tax returns, if received for the prior year, and must have been received for past three months in some situations. Bank statements are required for evidence of receipt or a court document which indicates and documents the payments. Continuation is analyzed also and must continue for 12 months. This will also depend upon AUS documentation requirements and documentation may be less. Child support and alimony may also be grossed 125% as it is non-taxable.
Other types of income include but are not limited to: retirement income, pension income, disability income, social security income, unemployment compensation, income from part time jobs, second jobs, interest and dividend income.
Social Security Income: (Non Taxable Income) Social Security income is used with an awards letter, bank statements or tax returns. The income is grossed up by 125% for tax purposes. For instance is someone has SS income of $1500 monthly 1500 x 125% = $1875. The underwriter must also know that the client who is receiving this income is of age to continue receiving it. 62 and up at this time.
Disability Income: Disability income is treated the same as SS income. It is grossed up due to non-taxable to give the client the benefit like other income is calculataed. It is grossed up 125% also. **disability income must be verified with awards letter and evidence of continuation because the disability income must continue for the next three years to be eligible for qualifying purposes.
Part time job income requires a history of working a part time job and is averaged or calculated on the history and the continuance.
Second Job: the applicant must have worked a full time job and a second time job for a minimum of 12 months, normally to be described as a history. There are again exceptions to rules and dependent upon the circumstances and the continuation.
All allowable other income is looked at for history and continuation, to include those others listed above.
In conclusion, an underwriter will use the regular base income if it is sufficient to qualify you for the loan. Other income is only used when it is necessary to make the loan work if the base income is insufficient for the debt to income ratio. This process may not always rule but it is what I call best practice and the other income can be used for compensating factors if needed.
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thank you Sis!! I am so glad you stopped by to read and give me more inspiration with your lovely comments. I appreciate your thoughts.
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Alisha
Alisha, sorry I missed your comment. Thank you for reading and coming by...nothing else required actually.
lctodd, this is great information and everyone should make this calculation before buying a home. Mortgage loan income calculations should be apart of the pre-approval process... Great hub Thanks :)
Thanks Katiem2. I appreciate you stopping by to read and comment. The income is calculated different than some people preceive so I thought I would give them a headsup.
My wife has received SS disability income for 14 years. We've easily qualified for a home purchase, but now the underwriter is demanding that her doctor supply a statement that, in essence, guarantees that her chronic pain condition will continue for the next three years.
This appears to be an invasion of privacy, and I don't know that any doctor would know whether any condition will continue, though WebMD says that there is no cure for her condition at this time.
What are our options?
Thanks
Kevin, this is normal for u/w purposes but I see your dilemma because some doctors will not write letters anymore. But, to make it simple for you and since she is asking for this; it is the best thing to try to do.
The doc does not have to swear that her condition will not go away. He can merely give her condition for the past 14 years and that it has not changed and tell how the condition affects patients in general and that there are no known cures. He can give the prognosis as he see it today and state that since it has continued for the 14 years; it is not likely to go away.
Now, the u/w needs to be experienced enough to know that she has drawn SS for 14 years, the condition has been present with her updated SS reveiws etc. and know that SS does not issue benefits without exclusive evaluation, consideration and much, much investigation. He/she needs to analyze the situation with an open mind and realize that with this history and something explaining the condition that it is not likely to just go away now. Common sense underwriting.
If you can't get the letter, then try printing all information about the prognosis of this illness you can find. There really needs to be some prudent, common sense here but try for the letter first. Most mortgage professionals know that this is a hard thing to supply anymore and they really need to make some other guidelines to cover this situation.
I hope this helps....let me know what happens.
Thanks for your thoughts.
Hi my husband is trying to get a fha loan in his name. I was wondering how his income would be evaluated. He works for pest control so it isn't all hourly and not all commision. He gets a production rate. This rate has went up more and more in the past year. THis is pretty much a raise. He makes a lot more now than he did last year. year to date he has made 37,000 so far. Would the fact that he hasnt been at the job for 2 years hurt and would the fact that he didn't make as much the previous year hurt. His middle credit score is 634.
Less than 2 full years should not hurt him. They will take the base hourly rate x 40 hrs x 52 weeks ./. 12 = base income. They will then more than likely average last years commission earnings/production + year to date for additional income.
They may get a verification of employment to see that this income is likely to continue and is consistent with company policy and guidelines and has been previously and not something that has just started. Normally most commission income is averaged over 2 years but if the loan is run in the automated underwriting system; it could only require the past 12 months if your reserves are good and other aspects of the loan. It is good that the rate for the commission has gone up and that is in your favor. They may also request from the Company how their profits and/or production has been previously;(not necessarily). The credit score should be fine for FHA without further derogatory information.
I hope this helps and let me know if you have further questions.
If an employee is working under contract for one year and then he gets the job in reputed company as an employee where he will be getting all the benefits of a company as per companies rules and regualtions. so does this will have a impact on applying loan since he finds himself in 1099 and W2 Category.
No, you will be find and your income will be based upon your current W-2 income. I have done this within mortgage myself. Worked contract then went to W-2 so you are fine. You probably made more $ wise contract but they will use the current salary. With all things as they are in the economy, this is pretty common now for a lot of people in a lot of different professions.
Great article! I work at a job that I was Furloghed for most of 2009. I only made 31000, I went back to work in march of 2010 and made 70000 for 2010. I shouldn't have a problem making 90000 for 2011. If I close on a house in June of 2011 is there a way to average my new ytd income. Instead of just averaging 09 and 10. I have a 787 mid score with plenty of reserves? Thank you
Sorry that I am just getting to this comment. Been busy. To your question:
Is your income commission or salary? Do you have 2106 expenses? Was your absense and lower income a one time thing that can be proven? If your income is salary, they should take the bi-weekly, bi-monthly or weekly salary and calculate income. That is just normal procedure. If part of it is other income, it will be average over the past 12 to 24 months, depending.... If it is commission with expenses; normally they will average the past 2 years. Now, if you can prove the one time absens from work, they might take the 2010 and ytd 2011 income for an average. I doubt they will just average the ytd income. They will not use the 70 + 90. They will take the 70,000 + the ytd earning up until June. (most recent paystub).
If your income is salary of 90 now...they will take each payday amount and X that by the number of times you are paid monthly. For instance....3750 x 24 for bi-mo, 3462 x 26 or 1731 x 52 weeks. So, they will not average; they will use the salary amount.
Again, commission is another story.
I hope this helps, hate to be the bearer of bad news but honesty is what you need....
What is important is if this is again; is it salary or commission or bonus. The two latter are always averaged for the most recent 24 months, usually. As I said they may use less depending upon your circumstances and your underwriter. If she is flexible???? If not, she will take the past 24 months.
Thank you for stopping by. I appreciate it.
WE ARE PLANNING TO BUY A HOME AND I JUST WANTED YOUR INPUT.
OUR AGI IS $220K (WIFE (GOVT EMPLOYEE) 130K, SELF 90K)90K IS SALARY FROM MY BUSINESS. FOR 2010 THE BUSINESS WILL HAVE A SMALL LOSS (IST TIME IN 9 YRS) WOULD THAT BE A PROBLEM IN GETTING A MORTGAGE FOR ABOUT $500K (LIQ ASSETS 200K)?
APPRECIATE YOUR COMMENTS
Robin, Thank you firstly for visiting my article. My comments are based upon how I would review your income history. As you know each underwriter views things a little differently, but this more than likely what will be reviewed:
1) Loss was due to what reason?
2) Is it likely to occur going forward?
3) Was your company capital sufficient to override the loss?
4) Could you pay all the bills with this loss?
5) It appears that your salary was paid as usual?
6) Is your salary going to be stable going forward as well as the company?
If the reason for the loss was a one time thing; I would not hold it against the company's overall stability. If it will be something that will continue, that is another story because what an u/w looks at is "stability" of the company to produce the salaries, the debts and overall income. It would have to be weighed and an average of the past 2 years of income for the company if the loan file constitutes a full review.
More than likely, a CPA letter of confirmation might be request with regard to the loss and the possibility of it occuring again. In other words; just how stable is the Company going forward.
Another list:
1) The loss will more than likely be substracted from your income, as it did exist. Depends upon the documentation requirements and how your underwriter looks at it and what your DU (Desk Top Underwriter findings) automated u/w system for Fannie Mae. You receive salary, so your documentation "might" be for W-2s and paystubs??? Then again they may request the 1040's and business returns, it depends. Your calculation of income should be based upon your paystubs/W-2 and then substract the average loss (if applicable and warranted).
2) If you have excellent credit DU may not require all documentation. It just depends upon both your credit and your liquid assets.
3) Your liquid assets are good and this will enhance your loan application. That is a plus.
4) Your Debt to Income ratio will play a part also in the DU evaluation.
5) Your principal and interest payment on 500K would be $2684.11 for 30 yrs @5.000% interest rate. That could vary depending upon the term, loan type etc.
6) Your loan to value will be considered. The lower loan to value, the better.
If this is a minimal loss, a one time loss, and the future looks okay; your credit scores are excellent, your loan to value is 80% or less, and your debt to income ratio is within 42+-, then my personal opinion would be that it is doable.
Another scenerio: I do not know what your other debts are but the housing ratio using your spouses income is only 24.78%. That of course does not include taxes and insurance. If she could qualify on her own,that is an option. Again, I am only using what you have given me here so I am limited and there is not a way I could even guess what your total DTI would be with taxes, insurance and other obligations.
You salaries appear to be very sufficient, you have liquied assets and the company debts will not be included in your debts.
I hope this helps but I really do not think that a one time loss will kill the deal (if it is not ongoing), but of course please remember that I am not looking at the entire loan file, only your above comments.
I hope it works out and thanks again for coming by.
Hi, I am new to underwriting and have an application and two yrs tax returns, w2's and first page of the 1120S. How do I calculate the income?
If the income on the W2s is sufficient; I would ask for paystubs and qualify with that income. If the 1120S is showing a loss...if that is substantial, then you would need to ask for the past 2 years of the SCorp 1120 returns to see if there has been a big decline in income for the previous years. You are looking for stability and if the 1120 doesn't show stability of the company, these clients might have a problem making the payments if the company failed.
Otherwise I would use the salary for qualifying purposes if no loss and income is sufficient.
Hope that helps...of course if you have 2 years W-2s you can also see if the salary has increased or declined.
I receive court ordered child support. Will the underwriter verify the order directly with the court or support agency that collects payments? Or will I have yo supply documentation? I ask because I cannot find my docs and court is a long drive and they stated 5 weeks to get a copt. The uw verified everything else directlu, employment, bank balances so I was wondering if they do same for chilf support income. Thanks
Normally you have to produce the court order documentation. You might want to see if the court can expedite the process if you tell them you have a loan pending and it pertinent that the documentation get to the u/w. You may need to provide your divorce papers or child custody papers which may have the terms and conditions laid out within them. They are going to want to see if you have received these monies consistently. Bank statements etc....hope this helps.
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Thanks for your comment and I will need to get back with you at a later date as I will be out of town for approximately 3 weeks. My concern is that I don't think we can have guest post on Hubpages. Maybe I am far behind. Thanks
Angela Blair Level 5 Commenter 24 months ago
Wow -- now this is info one can really use. There's so much mystery to the average person regarding mortgage loans and your concise information helps immensely. Thanks so much! Best, Sis