How is qualifying income for a mortgage calculated?
Is it safe to assume that you understand you will need an income in order to purchase a home? I sure hope that is a safe assumption. In case my assumption is incorrect. Yes, you need income in order to qualify to purchase a home. There are always caveats and exceptions to rules regarding qualifying income. I will cover those exceptions in a later article. For now, lets cover the general basics of qualifying income.
The first question after asking for information to check your credit will be about your income. The mortgage application requires me to collect two years of work history. The general guideline is that all lenders like to see a consistent work history over the past two years with no gaps of unemployment and a rising income. I know that extenuating circumstances can happen and that is why I mentioned I will deal with those in a future post. For now, let's stick with the general guidelines. You don't necessarily have to be with the same employer for the past two years but you do want to stick to the same profession or industry if possible. So have your work history, including dates of employment, documented for a smoother and easier application process.
People get paid in many different ways. The most important thing to understand about this is that all qualifying income must be documented and proven. Keep in mind that we use the gross amount (the money you get paid before taxes and all other deductions are taken out) for qualifying income. If you get paid a regular salary every week, two weeks or monthly, you have it easy. Just provide a months worth of pay stubs and we are good to go. Hourly workers need to provide a months worth of pay stubs as well. In order to calculate an hourly workers income we will look at the last 52 weeks worked and divide by 12 to come up with the average monthly income. If you are an employee that receives a commission income we will need to show you have received commissions for at least two years and then average that over 24 months to calculate the average commissions per month. Self employed borrowers must be self-employed for at least 2 years and provide 2 years of federal tax returns. The amount of income claimed on the federal tax return over the 2 years will be averaged over 24 months to calculate the average monthly income. If you want to use income from a second job there must be a minimum of two years uninterrupted history of this income.
What income documents you must have ready at a mortgage application.
A month of pay stubs - all salaried or hourly borrowers
All W2's from all jobs for the past two tax years - all salaried or hourly borrowers
Copies of your Federal Tax Returns - ALL borrowers