Step
One - Calculating Your Monthly Income
When a loan officer prequalifies you, he
works backwards to figure your maximum mortgage amount. You
can do the same thing. The first step is to determine
your monthly income. It isn't quite as easy as it
sounds. Lenders only count income they can document
through paperwork.
If you are a salaried employee, and don't
earn bonuses, it's easy. Get out your paycheck. If
you get paid twice a month, multiply by two. If you
are paid every two weeks, then you multiply by 26 (the
number of pay periods in a year) and divide by twelve. Unless
you're a teacher. Teachers don't always work year
round and they have special rules.
If you are an hourly employee who works a
straight forty hours a week and don't earn overtime income,
then it's easy, too. Look at your paycheck, multiply
your hourly rate by 40, multiply that total by 52, then
divide by twelve.
If you earn overtime, bonuses, or commissions
-- it isn't as easy. Lenders don't give you credit
for what you are currently earning. They average
your income from those sources over the last two years,
then add that to your regular salary or hourly monthly
income. If you want a shortcut that is usually close,
get out your W2 forms for the last two years. Add
them together and divide by twenty-four. That is
your monthly income.
If you are a teacher, a nurse, a seasonal
employee, in construction, or earn only part-time income
-- you can use that shortcut, too. Add the figures
from your last two years W2's, then divide by 24. It
generally gets you close.
If you are self-employed or receive 1099
income, then you need a two-year track record. Lenders
go by what you declare to the IRS as income, since that
is documentable. Since some self-employed people
overstate their expenses, this may understate your income. Look
at the Schedule C of your tax returns for the last two
years and the number at the bottom that says "profit" is
your annual income. You can add any depreciation
to that figure. Add them together and divide by twenty-four.
There are variations and exceptions (like
those who own their own corporations) but the above should
cover most people.