How Much Bacon Do you Bring Home? Determining your Income for a Home Loan
When applying for a loan, one of the most important aspects a lender must determine is how much money you make. It sounds easy enough. But you would be surprised how differently you and a lender may view your paycheck.
A mortgage lender will only count income they can document with paperwork. If you are a salaried employee that has been at your job ten years and you don't count any overtime or bonus income, not a problem. It's very easy to figure out how much money a lender will count as your monthly income. Just add up a month's worth of pay stubs, using your gross income, not what Uncle Sam leaves you. If you get paid every two weeks, multiply your paycheck by 26 and divide by 12. If you get paid twice a month, multiply by 2.
If you are an hourly employee who works 40 hours every week and gets paid for vacation and holidays, take your hourly rate, multiply it by 2080 and divide by 12. Again, it seems fairly straight forward and simple.
If you earn overtime, income or commission, it gets trickier. You don't get to count what you are currently earning unless you can show you've been earning it consistently. You can get out your tax returns and average your monthly income over two years. Sometimes, a written verification from an employer giving a history of this additional type of income may be required. This rule of thumb can work for those employed part time or for nurses, teachers or construction workers. Take two years worth of income, add it together and divide by 24. Your monthly income calculation should be pretty close to what a lender would come up with.
If you are self employed and/or receive 1099 income, than most likely you will need to come up with 2 years worth of complete tax returns (including schedule C, K-1's and the like) and have been at the job for two years. A lender is going to review all the schedules and deductions when determining an income. Oftentimes, a borrower comes up sadly short from what he states as monthly income to a lender after the lender puts it to paper. Or a borrower may be earning more than he can currently prove. I have a client who is earning more in his third year of self employment than he did in year one and two. Unfortunately, he has to wait till his 2007 taxes are done in January or count a lower monthly income based on 2005/2006 tax returns to do his mortgage transaction. Of course, he would qualify for a stated income loan, but his interest rate is higher.
So, take a look at your income from a lender's perspective when trying to figure out what you can afford. Even if you are a purchasing a home and your terrific credit score and job history don't require your lender to document your income, you should still be able to determine a true monthly income for yourself. The above scenarios cover most loan transactions, but there are mitigating factors that could change the scenario once the loan is in underwriting. However, these guidelines are a good place to start, and it can save you a lot of heartache in the long run.
Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist, at question@kristinmortgage.com or call (865) 567-0113. Kristin will try to answer all questions on her website Home Loans Plain Talk.
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