Here's a question from one of my readers (not one of my clients) regarding how bonus income is treated for qualifying for a mortgage:
I am trying to close on a property and the loan processor is giving me a hard time about my income. I am suppose to make $53,000 this year. Last year I made $50,000 according to my W2. My base salary is locked at $32,000 with the other income being a commission or bonus based off my offices profit.
Currently the loan processor is taking my year to date bonus/commission and dividing it by 12. She is stating that this is how they are the bonus income is annualized so it is making it seem like my projected income for the year will be 32,000 + approx 5,000 = 37,000. This is making my income to debt ratio pretty low. Do you have any advice on how I can get this adjusted or if this is actually the correct way my income should be calculated?
Lenders are looking for trends with income. Since your base income is a salary, the processor can give you credit for the entire amount. If your additional income is bonus or commission, then lenders may go back 24 months to create an average bonus/commission income. If your income is trending lower, best case–the lender may use the current average for your commission/bonus income. Lenders are looking for "stable" income…if the income is considered unstable, there may be issues.
Most lenders will typically go back 24 months including year to date bonus income; and average it since this type of income fluctuates and is not a guaranteed fixed amount. Hopefully your bonus income in 2009 is close to what your 2010 bonus income was and shows a positive income trend. You need to document that you've been receiving your bonus income for a minimum of two years.
2009 = $20,000 Bonus Income
2010 = $23,000 Bonus Income
3/31/11 = $5,000 Bonus Income
$48,000 divided by 27 (24 plus 3 months) = $1778 monthly bonus income.
If the base salary is $32,000; your loan application will reflect base monthly gross income of $2667. (32k divided by 12 months). Even if the base salary was lower in previous years, the current base (assuming it's a bona fide salary) is what is used to determine current monthly income for qualifying for a mortgage.
$2667 plus $1778 = $4,445 averaged monthly income (based on the example above).
Another factor to keep in mind is that lenders will pull 4506 Request for Tax Transcripts so if you write-off significant amounts of your business expenses, this may deducted from what the lender uses for your income.
Verification of Employment forms (VOE) will be sent to your employer to verify that your bonus is likely to continue. If your lender is relying on a Verification of Employment for your bonus income, they may annualized it (divide the current year to date amount by 12 months) instead of using an average. Plus, if your employer indicates that the bonus income is not likely to continue, it should not be used for qualifying purposes.
It appears to me that the processor is "annualizing" your bonus income ($5000 divided by 12 = $417) instead of averaging.
Talk to your mortgage originator about supply documentation (last two years tax returns, W2s and/or 1099s) to support your income to see if this will change how the processor is calculating your income.