How Do Mortgage Underwriters Calculate Income Of Home Buyers
This Article Is About How Do Mortgage Underwriters Calculate Income
Income is the most important aspect of qualifying for a mortgage loan.
- Home Buyers can have prior bad credit and low credit scores and still qualify for a home loan if they have income
- Mortgage borrowers cannot qualify for a mortgage with perfect credit if they cannot source and document income
- No doc and stated income mortgage loans no longer exist after the real estate collapse of 2008
- There are strict lending guidelines with regards to income and the types of income lenders can use
- Besides the income guidelines from HUD and Fannie Mae, mortgage underwriters have discretion on income and whether a type of income can be used for qualification purposes
- There certain ways How Do Mortgage Underwriters Calculate Income
How Underwriters Qualify1099 Income
There are certain ways How Do Mortgage Underwriters Calculate Income. Borrowers who are 1099 wage earners, mortgage underwriters will require a minimum of two years 1099 income and two years tax returns.
- Advantages of 1099 income wage earners is they can write off unreimbursed business expenses where they pay less in taxes
- The disadvantages of 1099 wage earners is lenders use adjusted gross income which is income after deductions of unreimbursed business expenses
- Way How Do Mortgage Underwriters Calculate Income is if borrowers had a larger income on the most current year, they will average the two years 1099 income and divide that by 24 months to use as monthly gross income
- If earned a lesser amount the most current year than the prior year, then the lower year’s adjusted gross income will be used
- So they will use the most recent year’s declining income and divide it by 12 instead of the two-year average
- That income will be divided by 12 months to yield the monthly gross income that can be used for mortgage qualification purposes
- Year to date 1099 income will most likely be required to see if income is in line borrowers will make the same amount as of the prior years
- If year date to date 1099 income is a declining income, then underwriter may decide to use the year to date income
- This is since it is declining income
- Or depending on how it is declining, may not qualify altogether due to declining income
- Mortgage underwriters can deny borrowers with steep declining income year after year
Or may use the most recent income to calculate monthly gross income.
How Underwriters Calculate W-2 Income
W-2 income is pretty straight forward.
- Most lenders will use the most recent paycheck stub to calculate income for W-2 wage earners
- Mortgage underwriters will require two years tax returns to see whether borrowers have written off any expenses on their tax returns
With written off expenses from their tax returns, those deductions will be deducted off their income and adjusted and reflected on their monthly gross income qualifications.
Increasing Income Due To Consistent Raises
Borrowers on the same job and have been getting consistent income, a mortgage underwriter may use the most recent pay grade to qualify income.
- This holds true as long as most recent raise can be confirmed through verification of employment
- The verification of employment will state job and income is likely to continue for the next three years
- Some lenders, not too many, will average the past two years W-2 income
Others will just use the most recent 30 days paycheck stubs as current income.
How Underwriters Calculate Declining Income
If income has been declining year to year, lenders may either average the past two years W-2 income. Some lenders may use the most recent income as income in qualifying borrowers:
- Some lenders will not qualify borrowers if they have steep declining income year after year
- If the lender does not qualify or denies borrowers a loan due to the fact they have declining income, then go to a different lender
This is because not all lenders have the same income qualification guidelines.
How Lenders Treat Gaps In Employment
Home Buyers multiple jobs in the past two years or gaps in employment, here is how it works:
The gap in employment where borrowers were unemployed for six months or less and just got a new job:
- income from a new job will be used
- 30 days of paycheck stubs will be required prior to closing on the mortgage
Unemployed for six or more months:
- need to have been employed on a new full-time job for at least six or more months
- have income from a new job to be used to qualify for a mortgage
- have offer letter of employment
- needs to have a full-time job
Qualifying With Overtime And Other Income
Borrowers with overtime income, part-time income, child support, alimony, royalty, and bonus income can use those types of income as long as they have had a two-year consistent history. Verification of employment will require confirmation that overtime income, part-time income, and bonus income will likely continue for the next three years.