How Do Underwriters View Recent Increase In Income

By Gustan Cho

Dec08_0001MA22763523-0016Depending on the mortgage loan underwriter, W-2 income is calculated in various ways.  Mortgage lenders require two years of employment history.  This does not mean that a mortgage loan borrower needs to have worked for two years at the same company.  You can have various jobs with different companies in the past two years and you can have had job gaps in the past two years.  Some mortgage lenders, especially banks and credit unions, will have their own internal mortgage lender overlays where they will require two years of continous work history with the same employer but this is not a mandatory Fannie Mae or HUD mortgage lending guideline.  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.  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.  All this happened in the past two years and the employee did not have an employment gap.  On this case scenario, the employee’s previous wages were steadily increasing so it is obvious that one years of W-2 earnings were substantially less than the most recent W-2 earnings.  With the recent increase in income, the mortgage loan underwriter will base the most recent increase in income as the income to qualify the mortgage loan borrower.

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 that the mortgage underwriter 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.  Lets take an example of a recent mortgage loan I closed:

Borrower A has a credit score of 587 FICO and since his credit scores were under 620 FICO, the maximum debt to income ratio allowed under FHA lending guidelines is capped at 43% DTI.  If his credit scores were over 620 FICO, the maximum DTI allowed would have been 56.9%.

Borrower A worked for XYZ Company in 2012 and 2013 full time and made $10.00 per hour.  In January 2014, 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 2014 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 mortgage underwriter needs to confirm via a written verification of employment that the current status of Borrower A’s employment is full time and 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 his start date of his new full time position.  The previous 2 years of irregular income does not come into play on this case scenario.

Recent Increase Of Income Due To Promotion

If you could not qualify for a mortgage loan before because of high debt to income ratios and you have had a recent increase of income due to promotion or a job transfer, you can potentially now qualify.  The day you get your recent increase of income is the day you can apply for a mortgage loan application.  However, you cannot close on your mortgage loan until you have provided the mortgage loan underwriter with 30 days paycheck stubs.

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