Essentials of Borrowing
Mortgage & Refinance Tips: Determining Your Income
When you apply for a refinance, debt consolidation or purchase mortgage, one of the most important factors in qualifying for the loan is your income. That may not seem like much of a surprise, but you may be surprised at all of the different ways your income can be calculated based on how well you can document it, and how much this can affect your loan process. Get a leg up on the loan officer and learn how to determine your income yourself. Your lender looks at your income on the basis of how well you can document it, and will allow you to borrow more money at lower rates the more you can document your income. If you have been in your job for a while and have years of W2 statements, IRS filings, and bank statements you probably fall into the Full Documentation or “Full Docs” basket. Typically you can borrow the most money as a percentage of the property’s value with a full doc income verification.
If you are on a salary and you get two checks a month, take the gross amount before taxes on your check and multiply by 2. That’s it, that’s your income (of course you’ll need to present a little bit more documentation to the lender!). If you get paid once every two weeks you can multiply the gross amount before taxes on your check by 26 (as there are 26 pay periods in a year) and then divide by 12, the number of months in the year. Hourly employees should multiply their hourly pay by 173 to get their monthly pay, unless of course you earn substantial overtime or commissions. In the event you earn substantial overtime or commissions/bonuses, you will have to pull out your W2s from the last few years and average them, usually just the past two years are used.
So add up all sources of documented income for each year and divide by 24. Self-employed / 1099 individuals should pull out Schedule C of their last two tax returns, add up the Profit line (which indicates how much money you told the IRS you made) for both years and divide by 24. If you earn money from rental of a property or any part thereof, you must have a legal rental contract and necessary local approvals to rent the property just to include the rental income at all, and you will only be able to use a portion of this rental income because lenders will assume that there is some risk of vacancy in the future. If you cannot fully document and verify your income or the bulk of it comes from commissions, bonuses or self-employment you may be able to apply on the basis of “Stated Income”, where if you have a sufficiently high credit score (in most case 620 or better but in special cases as low as 580) you are allowed to simply state to the lender what your income is. Stated income loan programs generally reduce the amount of money you can borrow in a cash out refinance, debt consolidation or purchase loan, and people who are on a fixed income such as social security or pension are not eligible for stated income programs. There are also a variety of limited document programs and even no document or “no docs” mortgage programs available for people with good credit and fixed incomes who need to borrow less than 70% of the value of their property.
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