Today’s economic landscape offers more ways than ever to earn additional sources of income. With more people choosing to pick up side jobs with the growth of the gig economy, pay structures from various sources of income are becoming more common. Mortgage guidelines are yet to adjust to this new environment which is resulting in a difference between a borrower’s true income and qualifying income more than ever before.
In addition, there are various pay structures such as overtime, commission, bonus, and variable hours. Qualifying income for mortgages is factored in terms of monthly income. The easiest income to calculate from a mortgage perspective is for individuals who receive an annual salary as you can typically just divide by 12 (the number of months in a year).
Calculating income becomes simpler for individuals categorized as ‘full-time’ employees with consistent working hours. To determine the income of these borrowers, the following calculation can be applied:(Hourly Pay Rate X Average number of hours worked per week X 52 weeks) /12 months in a year. If you don’t fit into these specific categories, determining your qualifying income will prove to be more challenging and will require additional documentation.
Generally speaking, when it comes to overtime, bonus, and commission income, a two-year average is going to be taken. Mortgage lenders usually need either year-end pay stubs or a written verification of employment (VOE) for underwriting to calculate the actual qualifying income. The VOE is an income breakout provided by the employer’s HR department. This is a standard document that most employers are very familiar with and provide easily. It is common for larger employers to outsource this function to a 3rd party.
The income analysis can get more complicated if the income has fluctuated or decreased. Loan underwriting takes a conservative approach. If your overtime, bonus, or commission income has decreased, you can expect your qualifying income to be lower than your two-year average.
In conclusion, if you are an individual who is earning overtime, bonus, commission, or other variable income from your job, it is important to get pre-approved early in the home-buying process to ensure all of your qualifying income is calculated correctly and maximized to the fullest extent possible. If you have questions about getting pre-approved or would like to get a rate quote, give us a call at 760-930-0569. One of our Mortgage Loan Originators will be happy to answer any questions you may have.