How to Calculate Income for Mortgages
Annual income is one of the most important numbers a lender needs to know to determine if a borrower is eligible for a mortgage. To the borrower, calculating yearly income seems like it would be an easy task. For the lender, however, it is a little more complicated. In some situations an average of the annual income for the past two years must be used. At other times, annual income can be determined by multiplying the monthly income by 12. Here is a step-by-step guide on how to calculate income for mortgages.
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Instructions
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Analyze a borrower's pay stub to determine whether they are paid an hourly wage or a salary.
To calculate an hourly worker's weekly compensation, simply multiply the hourly rate by 40. To determine the annual income, multiply that weekly compensation by the number of weeks worked during the year, usually 50.
To determine the monthly income, divide the annual income figure by 12.
If the borrower is paid a salary, take the pay amount from the pay stub and multiply it by the number of pay periods in a year to determine the annual salary. To find the monthly salary, divide that number by 12. -
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Overtime, commissions and bonuses can effect the borrower's annual compensation.
Lenders should look at tax returns and W-2 forms to find out if there is additional pay, and if it is sporadic or occurs on a regular basis.
If it occurs on a regular basis, it can be included as part of the borrower's monthly income.
Look at the borrower's W-2 tax form for two years and average the total compensation figure to find the average yearly income. Divide that number by 12 to get the monthly income. -
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Analyze the tax returns of a borrower who is self-employed. For most conventional mortgages, the lender determines the borrower's annual income by averaging two years of net income (the last line on the first page of a Form 1040) for the self-employed borrower. This number is divided by 12 to find the average monthly income.
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Tips & Warnings
If a borrower receives child support, alimony, or any type of Social Security income, this amount is added to the monthly income to find the total monthly income of the borrower.
Many self-employed borrowers take significant deductions on their income taxes. This can lower their income. Some mortgage companies allow underwriters to add back certain deductions, while others do not.
