Like many other mortgage processes
We are required to obtain transcripts directly from the Internal Revenue Service on every transaction to verify that the income used for the borrower’s is the income reported to the government. This can create some complications later on if we are not thorough in obtaining all income related documentation.
Let’s discuss qualifying W-2 salaried employees.
Required: Most recent W-2 and pay stubs reflecting a 30 day period.
First thing that we look for is if the pay stubs accurately reflect the income stated on the mortgage application. Then, the loan officer needs to determine if the consumer is paid weekly, monthly, bi-weekly or bi-monthly. Weekly you have 52 pay checks, monthly 12, bi-monthly 24, and bi-weekly 26, missing one of those distinctions can really mess up your income calculations!
At Fairway we ask for two years of W-2’s to insure that we do not miss anything important to the income calculations. In addition we also ask the borrower to provide their most recent federal tax returns.
Why the over documentation? Consumers can take a tax deduction for “unreimbursed business expenses.” This is a common practice; however, those deductions also have to be deducted from the borrower’s income. If we do not collect the tax return up front we could find out later in the transaction once we receive the tax transcripts that the borrower does not qualify! The same situation can occur if the borrower has a small business or other financial transactions that show a loss on their tax returns.
Forewarned is forearmed, so better to get more information right away and avoid nasty surprises later.
Other variables to consider when qualifying a W-2 employee:
If they are part time, they must have a two year history on the same job.
Those paid on an hourly basis must have two years of income to average if variable. Overtime must be averaged over two years
For bonuses, you need to review two years. If it increased, you average them, if it declined use lowest figure.
Any commission is figured the same way as a bonus; if increasing average two years, if declining use latest year only.
