How Much House Can You Afford? Calculating Your Monthly Income
When a loan officer pre qualifies 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
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
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 documenaeble. 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
This has some very important points for those that are self employed. I have worked with many self employed
people that were surprised at the requirements lenders imposed on them.
If you are on salary -- Currently lenders are getting skittish and requesting pay stubs to process your loan
and additional pay stubs to close your loan so please keep good records.
Also is good to know lenders use only the 43% of you Income to qualifies you.
What this means? The 43% of your income must be enough to cover the Mortgage payments, Real Estate
Taxes, HOA, Hazard Insurance and the other debts in your Credit Report as Auto Loans, Credit Cards etc.
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