Monthly Income: Calculating Monthly Income The Way Lenders Do

Monthly income will be the most important determinant along with your credit scores that will determine how much of a home you can afford.  It is not how much you make a month but how much monthly income can be verified by the mortgage underwriter.  All monthly income in mortgage approval process needs to be verified and cash income cannot be used for monthly income qualification purposes.

Calculating Monthly Income: Hourly And Salaried Monthly Income

If a mortgage loan borrower is an hourly full time employee the way you calculate it as follows:  Take the amount of the hourly rate and multiply it by 40 hours.  You then multiply that figure by 52 weeks and then divide it by 12 months and you get the monthly gross income.  Do not count overtime income or bonuses.  Overtime income and bonus income are a totally different subject matter and there are other ways of calculating bonus, overtime, part time, and other income in monthly income qualifications.

Salary Wage Earners

In the event if you are employee who is on salary, this is the way you calculate your monthly income for mortgage calculation.  If the mortgage loan borrower gets their wages twice in a month, then the paycheck is multiplied by 2 since and that will yield the monthly income.  If the salaried employee is paid every two weeks, then the paycheck needs to be multiplied by 26 weeks and then divided by 12 months to yield the monthly gross income to qualify for the mortgage loan.

Overtime, Bonus, Part Time, And Commission Income

Other income such as overtime income, bonus income, part time income, and commission income are more complicated to qualify and the mortgage loan originator needs to make sure he or she qualifies it the same way the mortgage underwriter will.  Mortgage underwriters will not count overtime income or other income unless you have a two year history and your overtime income, part time income, bonus income, or commission income will have the likelihood of continuing for the next three years.

Overtime And Other Income

Nobody can guarantee that your overtime and other income will continue so what the mortgage underwriter is going to request is a verification of employment from Human Resources and ask the Human Resources representative to write a letter that the overtime or other income is likely to continue.  In the event if the HR spokesperson is not willing to state that verbiage, overtime and other income cannot be used as additional income in the monthly income qualification.  In the event if the overtime income is allowed, then the way it is calculated is to take the sum of the two years of overtime income and divide it by 24 months.  In the event if the overtime or other income is last in the most recent year than the previous year, then the most current year overtime income or other income is only used and it is divided by 12 months to determine the monthly income.

How To Calculate Monthly Income For Self Employed Mortgage Borrowers

If a mortgage loan borrower is self employed or a 1099 wage earner, two years tax returns and income as a 1099 is mandatory.  Mortgage lenders will take the adjusted income after all deductions that you report to the Internal Revenue Service.  Lenders will go off the Schedule C of the tax returns from the previous two years  and will take your adjusted annual income to qualify income.  The sum of the two years income from your tax returns are added and divided by 24 months to determine your monthly income.  If the income from the most recent tax returns are lower than the reported income from the previous year, then the income of the most current year tax returns divided by 12 months will be used.  If you wrote off depreciation, you can add depreciation back to the tax returns and can add it to income.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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