Recent Increase In Income

Recent Increase In Income And How It Is Viewed By Underwriters

Gustan Cho Associates are mortgage brokers licensed in 48 states

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.

Related> Mortgage basics

Related> Qualifying for a mortgage

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