By HC TANNER
Many sites offer a variety of mortgage loan calculators for use by web surfers and visitors. There are monthly payment calculators, rent versus buy calculators, refinance calculators and on and on. I am taking aim in this series of articles to help you to use these calculators in a more effective way. Today we are going to examine the most widely used calculator, How Much Home Can I Afford Mortgage Calculator. More specifically, we are going to break down how to accurately estimate the qualifying income the mortgage company will consider when you apply so that you can enter that into a mortgage calculator.
The design of this calculator is to allow you to put in some basic income figures and have the calculator determine what payment your income will support and determine what loan amount that translates to and, by adding a down payment to that figure .how much home you can afford.
The pathway to answers using this calculator is full of many pot holes. Let us start with the first income determination. In my two decades of loan origination I have found that there is often a huge difference in what a potential borrower thinks they make versus what an underwriter is going to allow for qualifying. These differences are largest among the self employed crowd predictably.
If you are self employed and file a schedule C:
Your qualifying income is going to be determined by taking your verified schedule C gross income and subtracting all expenses (not including depreciation or depletion both are paper losses) for the last two years and averaging that into a monthly amount. There is an exception to the 24 month average rule and it is not good. The exception is if your income is lower in the most recent year versus the previous year it is being averaged with, the lower year will be taken on its own and averaged over 12 months. An explanation for the decrease will be required most likely and if it is significant, evidence that the bleeding has stopped might be required as well.
Example:
2009Gross Self Employment Income $100,000 – $20,000 of expenses (not including depreciation) is $80,000
2010Gross Self Employment Income $90,000 $20,000 of expenses (not including depreciation) is $70,000 net, taxable and qualifying income
Ordinarily underwriting would take the 80,000 and the 70,000 net figures and average them. In this case, since the 70,000 is the more current figure 2010, it will also be the qualifying income figure.
If you are Self Employed and Own a Corporation.
Whether you are a C Corp or an S Corp, the business tax returns will be required and the corporation will need to be profitable. A loss (not including depreciation) will bring doubt as to whether or not the company can sustain the salary income you might be deriving from it. S Corp losses and gains will appear on your personal tax returns but the corporate returns will still be required and should be reviewed as you work with a mortgage calculator.
If you are W-2 Employee Earning Bonus or Commission or Overtime Income.
You should first determine your base income. This would be your regular hourly rate x 40 hours a week or your regular monthly salary if that applies. Perhaps you are a nurse and work three 12 hour shifts in which case your base income would be your regular hourly rate x 36 hours. Do not use the over time rate in this case for calculating your base income. In summary your base income is going to be established by using your current regular hourly rate or salary figureno overtime, stipends, bonuses etc. Raises can be taken into consideration immediately when it concerns base income but will need to be evidenced with a paystub prior to closing.
Underwriting will determine your qualifying overtime using a verification of employment but you can simply take your last 24 months of overtime and average it to a monthly figure. Keep in mind that you employer is going to have to verify that the overtime is likely to continue in order to use it and if the overtime is declining it may not be considered. If you have doubts dont include it in your mortgage calculator.
Please also keep in mind that it is common to claim unreimbursed expenses when you file your taxes. Many people do not even understand these expenses or where they are claimed. If you itemize expenses on your personal Federal Tax returns, it is possible that you are claiming expenses for your job that are not reimbursed by your employer. In the industry we call these 2106 expenses because they are broken out on form 2106 but listed in total on your Schedule A. Typically these expenses will be averaged over 24 months and subtracted from the average gross income figure base pay plus overtime.
The following are general rules in determining income for the online Mortgage Calculator.
Rule One: Monthly Base Income equals:
a. Current Salary (even if recent raise) evidenced by a recent pay stub.
b. Regular Hourly Rate x up to 40 hours a week.
Rule Two: Bonus, Commission, Overtime equals:
a. 24 month average if increasing or steady.
b. Must subtract all unreimbursed job expenses claimed on tax returns
Rule Three: Self Employed Income equals:
a. Sole Proprietor Gross Income minus expenses (excluding depreciation and depletion) for the past two years evidenced by tax returns. Must have a minimum of two years in business to count.
b. Corporate Owner Salary or wage income plus review of two years of Corporate returns indicating the companys ability to continue paying your income. Business losses (excluding depreciation) indicate that the company may be unable to sustain your income and underwriting will take this into consideration.
Rule Four: Second Jobs
a. Must demonstrate a minimum of two years history of holding two jobs continuously in order to have this income accepted.
b. Income will be averaged over 24 months.
For questions or comments about this article please email hugh@themortgagecity.com.
About the Author: HC Tanner is a California Mortgage Banker for a prominent National home builder and is personally responsible for over $500 million in loan origination volume. Mr. Tanner is an expert in first time home buyer financing. Please visit
Mortgage Calculator
and
Mortgage Qualifying Calculator
.
Source:
isnare.com
Permanent Link:
isnare.com/?aid=661106&ca=Real+Estate