How to Use a W-2 to Calculate Income for a Mortgage

Lenders use W-2s to establish a borrower's recent income history.

Figuring income properly for a mortgage is one of the most important aspects of determining if a borrower can afford to make the monthly payments. If a person does not have enough documentable income in order to cover his set monthly expenses, his loan has a high risk of default and the lender may deny it or require additional down payment. Lenders use W-2s tax forms, among other documents, to determine and verify income for borrowers employed by others. W-2s document the wages an employer paid an employee in the previous year and the taxes withheld.

Instructions

1. Gather the past two years' W-2s for any job that the borrower has held for the entire period or that is a primary source of income within the same field over the previous two years. If a person had the same job, full- or part-time, for the entire two years, or worked consistently within the same field for different employers for those two years, the income from those jobs applies.

2. Get copies of one month's worth of pay stubs from the borrower's current job that include a year-to-date income total. If there is no year-to-date information on the stubs, ask the employer for written verification of the year-to-date income amount.

3. Add together the gross (pre-tax) income from the two years' W-2s, including bonuses, overtime and commissions if the employer has stated they are a regular occurrence that will continue into the future. If these are not regular, ongoing occurrences, do not count them as income. If there is more than one employer, figure the total income from each job separately.

4. Add the year-to-date total income from the most recent pay stub to the total from the W-2s.

5. Divide by the number of months the borrower held that job during the period covered by the pay stubs and W-2s to determine the monthly income for that job. For example, if a borrower submits two W-2s and a pay stub that shows four months' of year-to-date income but has been employed there for only 18 months, divide the total income from all those documents by 18.

6. Use the monthly income from the borrower's current position as the basis for qualification purposes and calculations such as debt-to-income ratios. This figure will best represent the borrower's future potential income.

Tips & Warnings

• Most loan programs also allow bororwers to include non-employment income in their monthly income as long as it is consistent, documented and will continue in the future. Examples of this income include retirement, disability, rental, settlement and judgment payments, along with child support and alimony. The lender can provide the specific loan program guidelines regarding these types of income.

• Self-employed borrowers and commission-based employee borrowers must supply the previous two years' tax returns in addition to, or in lieu of, W-2s.

References

• Real Estate ABC: How Much House Can You Afford?
• Federal Housing Administration: Borrower Employment and Employment Related Income