When you want to refinance, consolidate debt, or buy a house with a mortgage, one of the most important things is how much money you make. That might not seem like much of a surprise, but you might be surprised by how many different ways your income can be calculated depending on how well you can prove it and how much this can change the way your loan is processed. Learn how to figure out your own income to get ahead of the loan officer.
Your lender will look at your income based on how well you can prove it. If you can prove your income well, you will be able to borrow more money at lower rates. If you've been at your job for a while and have years of W2s, tax returns, and bank statements, you probably have what's called "Full Documentation." With a full doc income verification, you can usually borrow the most money as a percentage of the property's value.
If you get two paychecks a month and are on a salary, multiply the amount of your check before taxes by 2. That's it, that's your income (though you'll need to show the lender a few more documents).
If you get paid every two weeks, you can multiply the gross amount on your check before taxes by 26 (because there are 26 pay periods in a year) and then divide by 12, which is the number of months in a year.
Hourly workers should multiply their hourly pay by 173 to get their monthly pay, unless they make a lot of extra money through commissions or overtime.
If you make a lot of money from overtime, commissions, or bonuses, you will need to average your W2s from the last few years. Usually, only the last two years are used. So, add up all of the income sources that can be proven for each year and divide that number by 24.
People who are self-employed or get a 1099 should pull out Schedule C from their last two tax returns, add up the Profit line (which shows the IRS how much money you said you made) for both years, and divide that number by 24.
If you get money from renting out a property or part of a property, you must have a legal rental contract and any local permissions you need to rent the property. You will also only be able to use a portion of this rental income because lenders will assume there is a chance the property will be empty in the future.
If you can't prove and document all of your income or most of it comes from commissions, bonuses, or self-employment, you may be able to apply on the basis of "Stated Income." This means that if you have a high enough credit score (usually 620 or higher, but sometimes as low as 580), you can just tell the lender what your income is. Stated income loan programmes usually limit the amount of money you can borrow for a cash-out refinance, debt consolidation, or purchase loan. People who get a fixed income, like from Social Security or a pension, are not eligible for stated income programmes. For people with good credit and fixed incomes who need to borrow less than 70% of the value of their property, there are also a number of limited document programmes and even "no docs" mortgage programmes.
