This BLOG On Recent Increase In Income And How It Is Viewed By Underwriters Was UPDATED On April 18th, 2019
Depending on mortgage underwriters, W-2 income is calculated in various ways.
- Mortgage lenders require two years of employment history
- This does not mean borrowers needs to have worked for two years at the same company
- Home Buyers can have various jobs with different companies in the past two years
- Borrowers are allowed to qualify for mortgage with job gaps in the past two years
- Some mortgage lenders, especially banks and credit unions, will have their own lender overlays
- This is where they will require two years of continuous work history with the same employer
- But this is not a mandatory Fannie Mae or HUD lending guidelines
- Mortgage lenders do require two years worth of tax returns as well as two years W-2s as well as the most recent paycheck stubs
Borrowers Who Go From Part-Time To Full Time Recently
What happens if an employee started out with a company part-time, then eventually went to full time, and then got a promotion recently with a recent increase in income:
- If all this happened in the past two years and the employee did not have an employment gap, the new recent income increase will be used as qualified income
- On this case scenario, the employee’s previous wages were steadily increasing
- So it is obvious that one year of W-2 earnings was substantially less than the most recent W-2 earnings
- With the recent increase in income, the underwriter will base the most recent increase in income as the income to qualify the borrower
- An offer employment letter and written verification of employment will be required
Don’t Mortgage Underwriters Average The Past 2 Years W-2s?
Many home buyers who had irregular jobs or recent increase in income think they do not qualify for a mortgage loan because they believe underwriters averages their two years wages.
That is the case with 1099 wage earners or self-employed wage earners but not with W-2 wage earners. Let’s take an example of a recent mortgage loan I closed:
- Borrower A has a credit score of 587
- Since his credit scores were under 620, the maximum debt to income ratio allowed under FHA guidelines is capped at 43% DTI to get an approve/eligible per Automated Underwriting System Approval
- If his credit scores were over 620, the maximum DTI allowed would have been 56.9%
Borrower A worked for XYZ Company in 2016 and 2017 full time and made $10.00 per hour.
- In January 2018, Borrower A changed jobs to ABC Company as a part-time employee and made $12.00 per hour
- However, due to the hard work Borrower A did for ABC Company, the company changed Borrower A’s part-time status to full time in April 2018 and his new full-time hourly rate was now $17.00 per hour
- What income will the mortgage loan underwriter use to qualify Borrower A?
- The answer to this question is that the mortgage lender will go off the $17.00 per hour wage in qualifying this borrower’s mortgage loan application
- The underwriter needs to confirm via a written verification of employment that the current status of Borrower A’s employment is a full time
- Also, the borrower needs VOE that his employment is likely to continue for the next 3 years
- 30 days of paycheck stubs will be required prior to closing from the date of the start date of his new full-time position
- The previous 2 years of irregular income does not come into play in this case scenario
Recent Increase Of Income Due To Promotion
Mortgage Borrowers who could not qualify for a mortgage loan before because of high debt to income ratios and have had a recent increase in income due to promotion or a job transfer can now qualify. The day borrowers get a recent increase in income is the day they can apply for a mortgage loan application. However, borrowers cannot close on mortgage loan until they have provided the underwriter with 30 days paycheck stubs on new position.
