Mortgage & Refinance Tips: Determining Your Income

When applying for a refinance, debt consolidation, or purchase mortgage, one of the critical factors in qualifying for the loan is your income. While this may not be surprising, you might be surprised at the different ways your income can be calculated based on your documentation, and how this impacts your loan process. Understanding these methods can give you an advantage in dealing with lenders.

Income Documentation and Calculation:

1. Full Documentation (Full Docs):

If you have a stable job with years of W-2 statements, IRS filings, and bank statements, you fall into the Full Documentation category. This allows you to borrow a higher percentage of the property’s value at lower rates.

- Salaried Employees: Multiply your gross monthly salary (before taxes) by 2 if you receive two pay checks a month. If you are paid bi-weekly, multiply the gross amount on your check by 26 (pay periods per year) and divide by 12 (months in a year).

- Hourly Employees: Multiply your hourly wage by 173 to estimate your monthly income. If you have significant overtime or commissions, consider averaging your W-2s from the past two years, adding all sources of documented income, and dividing by 24.

2. Self-Employed / 1099 Workers:

For self-employed individuals, refer to Schedule C of your last two tax returns. Add the Profit line from both years and divide by 24 to determine your average monthly income.

3. Rental Income:

To include rental income, you must have a legal rental contract and necessary local approvals. Lenders will only accept a portion of this income, accounting for potential vacancy risks.

4. Stated Income Loans:

If you cannot fully document your income or if it primarily comes from commissions, bonuses, or self-employment, you may apply for a Stated Income loan. With a sufficiently high credit score (generally 620 or higher, but sometimes as low as 580 in special cases), you can state your income directly. Stated Income loans typically offer lower borrowing amounts for cash-out refinances, debt consolidation, or purchase loans and are not available for those on fixed incomes, such as social security or pensions.

5. Limited Documentation and No-Documentation Loans:

There are also limited documentation and no-documentation (no docs) mortgage programs available. These are typically for individuals with good credit and fixed incomes, borrowing less than 70% of the property’s value.

By understanding how your income can be documented and calculated, you can better navigate the loan application process and improve your chances of securing favourable loan terms.