One of the cornerstones of mortgage financing is determining your income. What on the surface seems like a fairly easy task can often times get bogged down in complex formulas. While some people do have complex income streams, for most the process to determine one’s income is fairly simple.
This might seem shocking to you, but most people really don’t know how much income they earn anyway. I speak with countless numbers of initial mortgage applicants each week, and only a few are even close to knowing what their income is. Sure you might know what your hourly rate is, or even your salary, but if you had to put on a loan application your monthly income, how close do you think you would get?
This article is not going to be a class on how to calculate income for a mortgage application. There are tons of classes that most in the mortgage industry have never taken themselves. I would rather break it down into some simple concepts. This will give you some idea of how we in the mortgage industry calculate your income, so you can get a better idea what your income truly is.
First off, everything we do on the mortgage application is done on a monthly basis. That means your income, your debts, and your other expenses – everything needs to be converted into a monthly amount. If you make $28 per hour and truly work 40 hours per week, you make $4,853.33 per month. If you are on a salary and are paid $2,700 every 2 weeks, you do not make $5,400 per month- you make $5,850. The examples are not to school you, but to show you that even the simplest calculations in our industry may be complex for a novice. And before we get into income calculations, let’s start by mentioning that when it comes to wages, we use gross wages – not take home pay.
One of the more tricky types of income to calculate is for those that get paid “other” than their base wages. That would include overtime, shift differential, locality pay, COLA, commissions, bonuses, and car allowances. The basic rule is that you have to have earned this type of income for the past 2 years. We average what you received as report, along with your year-to-date. If you have changed jobs but still receive this type of income, you are okay. But if you switched from a strict salary job to one that pays you a base, plus commissions, you may not be able to count that new commission income, unless you’ve received it for 2 year.
The next concept to get your head around is that in almost all cases the underwriter is going to determine your income based upon the income reported on your most recent 2 years of federal tax returns. If you have unreported income, you can’t use it to qualify for your loan. Hawaii has a large number of people that work in the service industry. That means tips. One of the biggest fallacies tipped income people make is in thinking that while they didn’t report their tip income for taxes, they can somehow magically use that income when qualifying for a mortgage.
It is also not just the tipped income people that hurt their chances to get a mortgage when not reporting all their income. Even the “rich” that fail to report private loan interest income and other sources of income also can’t now use it to qualify. A great example is the non-reporting or under-reporting of rental income. Simply – If it’s not reported on your tax return, you can’t use it. Of course there are always exceptions to the rule. After all, maybe you purchased a property since the last year’s tax return? In those cases, if income was earned, but there was no way to report it (because no tax return was due yet), there are mechanisms to allow you to use that income. But if you earned it, but failed to report it, you can’t now claim to use it, unless you amend your tax returns.
The point of all of this is that unless you are an expert at calculating income in the mortgage industry, you probably really don’t know how much you make. And to share a dirty little secret with you – most of the people who work in the mortgage industry cannot calculate income properly either. So to really determine if you qualify for that loan, you need to find that Loan Officer that knows what they are doing. Because the last thing you want to have happen is get three-quarters of the way through the process, only to find out you really can’t get the loan once the underwriter reviews your file.