Calculating Income

What all of the loan officers that I work with would agree upon is my biggest job is calculating income.  It's my job as the Loan Specialist to calculate each client's income accurately.  Anyone who is good at math like me should be able to calculate a client's income.  

Fortunately, I have the use of Fannie Mae's income calculator through one of our lender's.  All I need to calculate income is a client's recent pay stub and their W-2(s) if they were with their current employer last year and possibly the previous year as well.  

But any underwriter or Loan Specialist worth their grain of salt can calculate income by hand; at least they can calculate salaried or hourly income by hand.  There are two kinds of common salaried employment that require a bit of math to figure out, and those are two times a month salaried (also called semi-monthly salaried) and bi-weekly salaried.  Two times a month salaried employees get paid twice every month, typically on the first or last day and the 15th day (or so).  Bi-weekly salaried employees get paid every two weeks.  Because months cannot be divided equally into number of weeks, these differ slightly.  

To calculate a borrower's two times a month salaried income, take the amount they are paid twice a month and multiply it by two.  It's that simple.  You could also multiply by 24 to see their annual salary.  

To calculate a borrower's bi-weekly salaried income, you multiply the amount they are paid every two weeks by 26, because they get paid (roughly) 26 times per year, since there are roughly 52 weeks in a year.  You then divide by 12 to get their monthly income.  

To calculate hourly employees, you first have to figure out the amount of hours they work.  Hopefully it's close to 40 hours/week.  The problem with fluctuating hours is that a borrower must have at least a 12 month history of this in order to use their income, because otherwise the lender looks at it as unstable income.  Anyway, you take their usual hours worked (say, 40) and multiply by their hourly rate.  Some borrowers show multiple hourly rates, so the underwriter will always go with the lower rate.  Then you multiply by 52 to get how much they make each year, and divide by 12 to get their monthly amount.  If a borrower shows fluctuating hours, it's usually best to go conservative and calculate with their lowest amount of hours shown on a pay stub.

Besides those mentioned above, there's also self-employed income.  Depending on the complexity of the self-employed income, this is a lot harder to calculate by hand.  Fortunately, that's why Fannie Mae came out with their income calculator.  A couple things I've learned are that if the borrower shows declining income, the lender will go with only the most recent year's calculation, since averaging the prior year would raise it.  If a borrower shows increasing income, the lender will either go with the calculation for the most recent year or the last two years averaged.  This depends on the AUS results.  The AUS... well that's for another post.

Calculating income can be high pressure and stressful.  If you do it wrong and you give a client too much, you could blow up their deal and cause them to lose out on a home and possibly even lose out on thousands of dollars in earnest money they put down.  But if you can build the experience, rely upon tools and references at your disposal, it's really not too hard or bad.