Once you start the loan process, there will be a lot of
questions about how you are paid. Having the answers to these
questions before you meet with your mortgage professional to
finish up your loan application will save you a trip to the
filing cabinet to dig up more information.
Here are five questions you can expect your mortgage lender to
ask about your income.
1. How long have you received your current rate of
That big bonus won't help much if you haven't been getting the
same amount for the last two years. When in doubt, a lender will
look at your W-2s for the last couple of years and then look at
your pay stub to see what you've made so far this year. If you're
calling around to find out what you can qualify for, it would be
best to have this info handy so you don't end up making an offer
on a house that your income doesn't support.
2. How often do you get paid?
Are you paid every week, every two weeks, twice per month, or
monthly? This may seem irrelevant, but here's an example of why
it's so important. Let's say you get paid $2,000 biweekly, but
you say you get $4,000 per month. If we assume you're only
getting paid twice a month, then a lender uses $48,000 per year
to qualify you. But if you are actually paid biweekly, we're
shorting you about $300 per month worth of income because you
actually get paid every two weeks, giving you a couple of extra
pay periods per year. That extra $4,000 per year could make about
a $20,000 difference in your borrowing power on a 30-year fixed
3. What's the deal with the ups and downs?
If you've experienced a big drop in income from last year,
chances are an underwriter will use the worse of the two years to
figure out how much mortgage you can get. Did your income
skyrocket from last year to this year because of some big
commissions? That's great, but the underwriter will likely take
the average of the two years, so that McMansion may not be in the
cards just yet. If there has been a change in your
, like a big salary increase, then you can use this income right
away. Also, if you have experienced a change in income of more
than 10% year over year, plan on having someone in human
resources write a letter explaining the reason for the change,
especially if it was due to a promotion or new position within
4. Are you new on the job?
So long as you're getting paid a salary or a full-time hourly
rate, being new on the job is not really that big a deal. Often
customers won't apply for a mortgage because they started a new
job and think they need a few years on the job first; that's just
not the case. If you just graduated from college, then you will
at least need to have a copy of a transcript verifying that your
degree was somehow related to your new job.
If you are starting a new job, you'll want to time your
approval for a loan around getting your first paycheck. There are
some cases where a lender might let you close your loan without
that first paycheck, but that's usually only if you have a fully
executed employment contract.
Career changes can be a little bit more complex, but if you
can explain the nature of the position and its relation to your
skill set, and the new career involves a salary or full time
hourly pay, you'll probably be OK to qualify for a mortgage
without too much hassle.
5. Are you paid commission and/or do you have reimbursed
Salespeople who earn commission need to provide a full two years
of tax returns for one primary reason: unreimbursed business
expenses. This important detail is often overlooked, and it can
have a tremendous effect on how much loan you can get. The
section of the tax return that will be scrutinized is the 2106
expenses. These expenses are treated like extra debt. If you
write off $12,000 per year in unreimbursed expenses for meals,
entertainment, mileage, dues, subscriptions, equipment, etc.,
then guess what? That's $1,000 per month of payment liability
that just got counted against your income.
Foolish final points
If you are thinking about changing jobs in the middle of the
loan process, make sure you let your mortgage professional know.
Lenders will check your employment status at the beginning of the
process, in the middle, and on the day of closing, so last-minute
changes in employment are sure to cause trouble for your mortgage
If you don't have enough income on your own, there are loan
programs that will let you add a relative's income to help you
qualify even if they aren't living in the house. Keep in mind
that they are on the hook for the mortgage and it will count as a
new payment on their credit report even if you make the payments.
This is a great way for a parent to help an adult child buy his
or her first house.
One final point about income: You only get one chance to make
a first impression. It may seem like mortgage underwriters look
for reasons to turn down loans, but the truth is that they like
to have all the facts about how much you make in front of them
with details and explanations to address any changes. The extra
work it takes to provide all of this information up front often
means the difference between a painless loan approval and a
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