As I sit down to write about this section of the 1003 (huh?) it strikes 
me that several post can be written about income analysis. The primary purpose of this post is to discuss, in general terms, how lenders review income for mortgage applications.
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W-2 Income |
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Source of Income |
How Reviewed |
Exception/Warnings |
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Hourly |
Averaged for the last two years. This average is compared to the latest 30 day pay period |
If the current number of hours worked has increased as compared to the two average, this is generally a good thing. Although underwriting may confirm that the increase in hours will be likely to continue. On the other hand if the current number of hours shows a decline this is generally a negative. Underwriting may validate your income based on the lesser hours. Increases in hourly pay are considered. |
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Salary |
Straightforward, what is your current gross income |
If salaried income has been declining then the continuation of employment may be in question. |
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Overtime |
Averaged over the previous two years |
The same as applies to hourly pay as noted above. The regular occurrence of overtime is important. As an example if you have only been receiving overtime for the last six months the continuation of overtime will need to be justified. The opposite is true if recently overtime has been declining or is no longer existing then it may be that no history of overtime may be counted. Be prepared to justify fluctuations in overtime pay. Changes in employment will be scrutinized. |
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Bonus |
Averaged over the past two years |
Similar to concerns expressed for hourly and overtime. Changes in employment will be scrutinized. |
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Commission |
Averaged over the past two years. Two years of self employment in the same line of business in the same location is the standard requirement. |
In addition to items expressed above, tax returns will be analyzed for “Form 2106” deductions filed. Unreimbursed employee expenses will be averaged for a two year period and subtracted from gross commission income. |
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Self Employed Income
Two years of self employment in the same line of business in the same location is the standard requirement. Two years tax returns with supporting schedules will be analyzed. Look for additional post regarding analyzing tax returns for the self employed borrower.
1099 Income
Treated the same as the verification of income for the self employed. One example of this type of income will be many real estate agents. Beware if you have moved to another location you may not qualify without a history of earned income.
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Other Sources Of Income |
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Type of Income |
How Reviewed |
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Interest |
Must have been received consistently for three years and assets will be reviewed to determine the likelihood of continuance. |
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Dividends |
Must have been received consistently for three years and assets will be reviewed to determine the likelihood of continuance. |
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Capital Gains |
Must have been received consistently for three years and assets will be reviewed to determine the likelihood of continuance. |
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Alimony, Child Support, Separate Maintenance Agreements |
Documentation will need to be provided proofing the commitment of the receipt of this income. Proof that payment has been received for at least one year. Documentation will need to be provided that this obligation will continue for at least three years. |
Net Rental Income
Gross rental income is reduced by 75% to account for potential vacancies. Any mortgage principle, interest insurance and taxes is then subtracted from the vacancy discounted income.
As indicated in the opening paragraph this is a general overview of income considered for mortgage loan applications. Look for additional posts regarding analyzing income for a home loan application.
Combined Housing Expense
Your present housing expense will be compared with the proposed housing expense resulting from the new home loan. Housing shock, which is the percentage increase from the present to proposed housing expense, will be reviewed. This may be a critical analysis if debt to income ratios is high and/or if reserves are low.
Feel free to comment on experiences or difficulties you’ve had with the income analysis of your client’s home loan applications.
Stay tuned
Your Home Loan Application----Series 5---- Assets and Liabilities
Related Posts
Your Home Loan Application----Series 1----Property Information and Purpose of Loan
Your Home Loan Application----Series 2----Borrower Information
Your Home Loan Application----Series 3----Employment Information
Jay Williams
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