Your income is an important factor when qualifying for a mortgage. Lenders have returned to underwriting based on basics like adequate income, good credit, and sufficient assets. You need all three components to qualify for a refinance or purchase mortgage today. A solid application is the best way to ensure that you are offered the best refinance interest rates. Here is how underwriters view one component, income, when you apply for a mortgage:
- Salaried W-2 Income--Your income is calculated based on how often you are paid. For example, if you are paid every 2 weeks the gross amount (before taxes and other deductions) is multiplied by 26 and then divided by 12 to get a monthly salary. If you get paid weekly, multiply your gross pay by 52, then divide by twelve. And if you get paid twice a month, multiply your gross pay by two.
- Hourly W-2 Income--If your hours vary, your income will have to be averaged. Provide a couple of years' W-2s and 1 month's pay stubs showing your year-to-date income. If your hours are fixed, calculate your income as though you are a salaried employee.
- 1099 Income--Self-employed applicants generally provide year-to-date financial statements and two years' tax returns--maybe three if your income varies widely. Underwriters use a tool like Fannie Mae's Comparative Income Analysis Form to calculate income. A "quick and dirty" method is to take the taxable income and add back depreciation or depletion. If your income has declined, the underwriters will likely consider only the lowest year's earnings, not averaging several years because that could overstate your current income.
- Commission Income--If you don't have a couple of years' experience as a commissioned employee (25% or more income from commissions) it is likely that your commissions won't be counted. Underwriters average commission income as they do self-employment income. You will need your W-2s, 1099s, and two years' tax returns. Employee business expenses listed on IRS Form 2106 are deducted from your gross pay.
- Employee Bonuses--To count bonuses in your income, you have to prove that they are paid regularly and that you can expect the payment to continue. You will need a couple of years' W-2s as well as your tax returns and maybe a letter from your employer explaining how bonuses are determined and paid.
- Owners of corporations or other entities that file their own tax returns should provide three years' of returns from all businesses plus their personal tax returns. Financial statements or letters from CPAs may also be required. Income is treated as conservatively as possible--the lowest year if income declines or an average if it increases.
Knowing how your income will be viewed in crucial. Because before you can ask, "Should I refinance my mortgage?" you have to know the answer to, "Can I refinance my mortgage?"
Source: Efanniemae.com
About the Author:
Brent Lane is a Mortgage Consultant in Roseville, California. He helps homeowners in California with their mortgage financing and writes on his BLOG at www.thelanegroup.blogspot.com.
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