Your job has a huge influence on your Mortgage pre-approval. Several different things have to be taken into consideration in order to get effectively approve your income. The waters can be muddied even further when you include things like job transfers, bonuses, overtime and commissions. I put this brief guide together in an effort to explain the details of how your income is calculated when it comes to different jobs and ways people are paid.
It is also important to know that lenders will calculate your GROSS income. That is before taxes.
Usually the easiest to calculate because a persons paycheck is the same every week. Lenders can look at your most recent pay stub and see what your annual salary is (not including bonuses). This type of income can be calculated very simply by taking the annual salary divided by 12 months in a year. Example: A person who receives $65,000 annual salary has a monthly gross income of $5,416.66.
The most common way most people are paid is by the hour, there is a slightly different calculation used to figure this income. Lenders pay careful attention to the number of hours worked, paid time off and year to date income. Because most hourly employees will have a fluctuating income due to time off or vacation, and some employees are paid weekly vs. bi-weekly; the lender will first calculate your hourly rate multiplied by number of hours worked per week. If a person makes $20 per hour and works 40 hours per week and is paid every two weeks, the formula looks like this:
$20 x 40 hours =$800 per week.
$800 per week x 52 weeks in a year = $41,600 annual income.
$41,600 annual income divided by 12 months in a year = $3,466.66 gross income per month.
If an employee worked 40 hours every week and took no time off that would be their income. But life happens and often times people have to take time off, sometimes it’s paid and sometimes it’s not. So the underwriter will look at year to date income as well, that is the total income made so far this year. If an employee’s income is not projected to meet the $41,600 annual income the underwriter will use the more conservative estimate and reduce the income. Let’s take the same example with the $20 per hour employee, assume we are on the 24th pay date in 2018 (11.29.2018) The formula would be as follows:
Year to date income as of 11.29.2018 = $34,133.34
$34,133.34 will be divided by the number of pay periods we are in, which is 24. = $1,422.22. This would be considered your bi weekly gross income.
$1,422.22 x 26 (26 pay periods in the year) = $36,977.78 (this would be considered your annual gross income)
$36,977.78 divided by 12 months in a year = $3,081.48. This would be considered your gross monthly income.
Lenders will always take the more conservative estimate on your income to mitigate their risk. So it’s important to bring the proper documentation in for your pre approval, and work with a qualified experienced loan officer that will know what formula to calculate so you do not run into issues later in the loan process.
Commissioned employees are a different formula altogether. Lenders will require a 2 year history of commissioned income so they can average it. Clients who do not have a two year history at their job cannot include their income. There is an exception to this rule if an employee has not been on their current job for 2+ years. If the employee has had multiple jobs in the last 2 years that are in the same industry (example car sales) and has received commission from each job, the lender can consider the person to have a 2 year history of commissions even if it’s not with the same employer.
The commission formula is as follows:
2017 commissioned income = $75,566
2016 commissioned income = $72,233
$75,566 + 72,233 = $147,799
$147,799 divided by 24 months = $6,158.29 per month. This is considered your gross monthly income.
Because lenders will always be conservative in their estimates, they pay attention to see if your commissioned income has increased or decreased in your most recent year. If your commissioned income has decreased in 2017 vs. 2016, they will only average the lower of the two. If we reverse the 2016 income of $72,233 and pretend that is your 2017 income, your annual gross income would be $6,019.41.
Bonuses are considered to be like commissions, an employee will need a 2 year history. The two year history will be averaged exactly like the commission formula and divided by 24 months. If the bonuses have decreased over the years they will go off the most conservative estimate (the lower). Bonuses can be considered with any type of employee.
Non-Reimbursed Work Expenses (Deductions)
If an employee (commissioned / hourly or salary) has expenses that are no reimbursed by their work (I.E entertainment, travel expenses) this will have to be deducted from the annual income if it’s expected to continue. The most common cases where we see this type of deduction is with sales people, truck drivers and contractors. The annual schedule C amount is deducted as follows;
Schedule C deductions = $5,047.
Annual income = 54,555 / Monthly income = $4,546.25
Schedule C deductions of $5,047 divided by 12 = $420.58
Monthly gross income of $4,546.25 – Schedule C deduction of $420.58 = $4,125.67 gross income.
Self Employed Employees
Self employment income is calculated exactly the same as commissioned, over a two year history. It’s necessary that a client have a 2 year history of an operational business. Often times self employed clients have significant write offs on their tax returns, so it’s important to see the full returns upon pre approval so your loan officer can calculate the income properly. The different between commissioned employees and self employed employees is the fact that certain things like depreciation can be factored back into a self employed borrowers income to increase their annual profit. If a borrower shows a negative income on their taxes, unfortunately that will be used for qualifying purposes and make it difficult to attain a mortgage.
There is an exception to this rule however, we have certain bank statement loans available that are effective for self employed clients. We are able to use deposits into the business account and average them over a 24 month period to calculate a projected income. These loans are a loophole in the traditional mortgage process.
I hope this lengthy article has been helpful in understanding how your income will be calculated when qualifying for a mortgage. If you want to find see if you qualify You can start by clicking here or by contacting me via the information below.
- C) 920-530-4484
- O) 920-490-8823
- F) 920-490-8967
909 . E Walnut Street
Green Bay WI 54301