I got a question from a friend recently on income and how the mortgage underwriter will determine what monthly income to use or qualifying income. This figure is crucial, because it is one of the main factors in determining your debt to income ratio (DTI)- (Total monthly obligations/total monthly income). I will talk more about DTI ratios in the future.

 Since this friend is a full-time employee, I decided to write a simple summary on how to calculate your monthly income. So for all you full-time employees, go ahead and grab your most recent paystub. Here are the 4 basic income calculations to determine monthly qualifying income.

Annual Pay – If your paystub shows your annual salary, (i.e. $50,0000) then congrats, underwriters love to see this type of paystub. This is very quick and easy calculation, $50,000/12 =$4,166 monthly income.  Notice, I’m taking your annual gross pay, not net pay (after taxes). It is very common to use gross pay when calculating the borrowers monthly income.

Bi-weekly – If you get paid every two weeks, then your paystub will show a start and end date for your pay period.  For Example  start: 3/4/11 – end: 3/18/11. In this case you will have 26 pay periods throughout the year. So if your current paystub shows a gross pay of $2,000, then calculate: $2,000*26 =52,000/12 =$4,3333 monthly pay.

Semi-Monthly – Now if you get paid twice a month, then you will see a pay date that hits the 15th and 30/31st .  Of course you already know this because everyone in your office looks forward to the 15th and last day of the month…especially if it hits a Friday! So on your paystub, the dates will show: Ex. 3/1 -3/15, then your next paystub will show 3/16 – 3/31. With semi-monthly you have 24 pay periods in the year. Using the same example as above with a gross pay of $2,000 you can calculate as follows:  $2,000*24 = $48,000/12 = $4,000 monthly income.  The underwriter would use the $4,000 monthly income as the figure to calculate your debt to income ratio.

Hourly – You can also calculate your base monthly income using your hourly rate. If your paystub shows an hourly rate of $25, then you can calculate your monthly income as follows.  52 weeks in the year, working 40 hours a week (full-time):   52*40 = 2080.  Now take your hourly rate: 25*2080 =$52,000 annual.  $52,000/12 =$4,3333 monthly income.   Many times it is also helpful to divide a borrower’s annual income by 2080 in order to figure their hourly rate. This usually happens with part-time workers, or any borrower who is working less than 40 hours a week.  Notice that we are using the gross pay to find your monthly income, don’t worry about your net income. Now many might say, isn’t it more realistic to use the net pay. After all this is the actual amount of income I’m taking home?- yes that is correct. But for now, I’m going to keep this very simple. I will have some follow up post that cover income in more detail, as well as self employed borrowers.

One thing I will look for in your deductions is wage garnishments. This will tell me if you have child support or judgment/lien obligations that may not be reported on your credit report.  Now I may still give you credit for your gross monthly pay, but I will add the monthly garnishment as part of your monthly debts. In addition, I will ask for the divorce decree to verify the terms of the child support payments and how long those payments will last.  I’ve had many situations over the years, were the borrower did not disclose child support payments to the loan officer up front.  As a result the debt to income ratio looked great. Then all of sudden, oops! The borrower owes an extra $500 a month and now the DTI doesn’t look good and the loan is declined- not fun.  So if your paystub shows a garnishment, go ahead and disclose this payment to your loan officer up front, it will help prevent any headaches later on and your underwriter will appreciate it.