Mortgage Refinance Tips Determining Your Income
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Mortgage & Refinance Tips: Determining Your Income
Summary:
When seeking a refinance, debt consolidation, or purchase mortgage, understanding how your income is calculated can significantly impact your loan qualification. Knowing how to document your income effectively gives you an advantage in the loan process.
Article:
When applying for a refinance, debt consolidation, or purchase mortgage, your income plays a crucial role in qualifying for the loan. While this may seem obvious, the various methods of income calculation can greatly influence your loan outcome. By learning how to determine your income, you can better navigate the loan officer's expectations.
The lender evaluates your income based on how well it can be documented. The more comprehensively you can verify your income, the more favorable loan terms you can secure. If you've been at your job for a while and have accumulated W2s, IRS filings, and bank statements, you're likely in the "Full Documentation" category. This often allows you to borrow a larger percentage of your property's value.
Calculating Your Income
- Salaried Employees: If you're on a salary and receive two monthly paychecks, multiply your gross (pre-tax) pay by 2 to determine your income. You'll need to provide additional documentation to the lender as well.
- Employees Paid Biweekly: Multiply your gross paycheck amount by 26 (the number of biweekly pay periods in a year) and then divide by 12 to find your monthly income.
- Hourly Workers: Multiply your hourly wage by 173 to estimate your monthly income, unless you have significant overtime or commissions.
- Overtime, Commissions, and Bonuses: If these form a significant part of your income, average the amounts from your W2s over the past two years to get a figure. Combine all documented income for each year and divide by 24.
- Self-Employed/1099 Workers: Use the Profit line from Schedule C of your last two tax returns. Add these amounts for both years and divide by 24.
- Rental Income: Ensure you have a legal rental contract and necessary approvals to include rental income. Lenders typically consider only a portion of this income due to potential vacancy risks.
Alternative Income Documentation
If your income is challenging to document, or primarily consists of commissions, bonuses, or self-employment, you might consider a "Stated Income" approach. Generally, this requires a high credit score (typically 620 or above, though some cases allow as low as 580). Stated income loans may limit the amount you can borrow through cash-out refinance, debt consolidation, or purchase loans. However, those on fixed incomes like social security or pensions are not eligible for these programs.
For individuals with good credit and needing to borrow less than 70% of their property's value, there are also limited or no document mortgage programs available.
By understanding these guidelines, you can better manage your mortgage application process and optimize the loan terms you qualify for.
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