One of the more challenging aspects of figuring out how much of a mortgage someone qualifies for is determining the income we use. While it may seem straightforward, the agencies that make the rules for most mortgage loan programs have very strict requirements for what income may be used and what cannot. Adding to the challenge, there are many different variables and situations can apply to the calculation.
There are two key things that an underwriter is looking for when it comes to income. First, does the income provide the ability to repay the mortgage; and, second, is there a reasonable expectation of continuity of the income for at least three years. A significant factor in determining an income that can be reasonably expected to continue in the future is the evaluation of income received in the past. Regardless of your type of pay, it is likely that your tax returns will play a significant role in determining your qualifying income.
It is important to note that what follows is a brief overview of common guidelines and may not translate accurately to your specific situation. You should contact me for a more specific evaluation of your situation.
You would think the calculation for a salaried employee, meaning one being a paid a fixed amount every pay period, would be easy to calculate. It typically is, but there could be some hang-ups if any unreimbursed employee expenses are deducted on tax returns or if the salaried position is new and not consistent with that person’s previous employment history. In general, if you have been in your salaried position for at least several months, your previous employment is consistent in terms of industry or experience, and you only take the standard deduction (or perhaps the mortgage interest deduction) on your taxes, then your regular monthly income is likely safe to use for qualifying purposes.
Note: Many non-employment income sources, such as retirement/pension income, social security, or disability income are fixed monthly amounts that can be used just like salary income.
Hourly, Commission, Bonus, or Other Variable Income
These are situations where it can get very tricky. You will likely have to provide at least a one-year history of this type of income, perhaps two years, and that income will be averaged over that span of time. So, even if you just received a significant raise, you may not receive the full credit for that raise in the income used to qualify you for a mortgage right away. In fact, if you just received a significant bonus for the first time, it might make for a good down payment, but unless there is a contract stating you will, without condition, receive a bonus of a specific amount at specified times, it cannot be included in your income until you have a documentable two-year history of receiving it.
If you are self-employed and attempting to figure out how much of a mortgage you can qualify for, the best advice I can give you is start with your Adjusted Gross Income. In most cases, the amount of income that will be used to qualify you will not be lower than the amount of money you report to Uncle Sam and pay taxes on. In many cases it may be higher as non-cash expenses, such as depreciation, may be added back in to increase your qualifying income. Honestly, there are simply too many variables to provide any direction on how to determine self-employed qualifying income yourself. There are considerable differences between sole proprietors, partnerships, and corporations as well as types of income and deductions and how they are applied.
If you would like more information or if you would like a professional evaluation of your qualifying income, do not hesitate to contact me at your convenience.