Type of income and prequalification

“Why does it matter how I’m paid as long as I get paid?”

I’ve received that question numerous times over the past several years being in the mortgage industry. The question does make sense – as long as income from a job is coming in on a regular basis, why does it matter if someone is self- employed, a W2 employee, or a 1099 contract worker?

Unfortunately, for the self-employed or individuals paid on a commission or bonus structure, it does matter. Why? Due to the up-and-down nature of running a business or income based on monthly/annual performance, underwriters want to see a historical record of income that is earned over the course of up to two years.

Unless you are a W2 employee whose salary will be the same every month regardless of the economy or sales, the only way to document your income is through annual federal tax returns. By reviewing tax returns for the past two years, an underwriter can see documented monthly income for 24 months to gauge expected future income.

Here are some examples of different ways one might be paid and what steps are necessary to document the income:

• W2 salaried income – this is the easiest to document. All that is needed is the past 30 days of pay stubs. If recently moved to a new job in the same field still as a W2 employee, a pay stub reflecting 30 days on the job with an acceptance letter to the new position should do it.
• W2 base pay with commission/bonus income – if commission/bonus income is less than 25% of the total salary, then the same rules apply as above should apply. If more than 25% of the total salary, then up to two years of tax returns will be required to document the income.
• Full commission income – up to two years tax returns will be required. Note that any business expense write offs on the tax return will lower the income that can be used to qualify you for the loan.
• Self-employed – two years of tax returns will be required. Again, any claimed business expenses (personal or for the business itself) will reduce the income that can be used to qualify you for the loan.
• Bonus income – two years documented bonus income will be required along with documenting its continuance.
• Same job at the same company but change from W2 salary to commission/bonus income – This is happening more frequently in the business world. Positions that were once salaried are becoming positions with base pay plus commission. If the base salary is sufficient to qualify for the loan, then only pay stubs are required. However, if the commission is also needed to qualify for the loan, then up to two years of tax returns would be required.

Loan programs such as stated income and no documentation loans are no more due to the credit crunch. This means all income must be verified and documented – making how one gets paid all the more important.

If you are looking to buy a home or refinance an existing one and you are not paid as a W2 salaried employee, it is imperative to speaking with a mortgage consultant to ensure everything is order before you are ready to make an offer. If you are in the state of Georgia, I would enjoy the chance to review your situation and help qualify you to buy a home–give me a call!