Tips for Refinancing: Evaluating Your Income

One of the most significant considerations in deciding whether you apply for a refinance, debt restructuring, or buy mortgage is your income. That might not come as a shock, but you may be shocked by the many different forms your salary can be measured depending on how well you can log it, and how much this can affect your loan application. Get a head start on the loan officer by learning how to calculate your own salary.

Your loan measures your income based on how accurately you can record it, and the more you can document your income, the more money you can borrow at a cheaper rate. If you’ve been working for a long time and have years of W2 accounts, IRS filings, and bank statements, you’re most definitely in the Full Reporting band. With a full doc income check, you will usually borrow the most money as a percentage of the property’s worth.

If you are paid a wage and get two payments per month, add the total value of your check before taxes by two. That’s it; that’s your salary (though you’ll have to provide the lender for any additional documentation!).

If you get paying every two weeks, average the total sum until taxes on your check by 26 (because there are 26 pay dates in a year) and divide by 12 (the number of months in the year).

Unless you get a lot of overtime or commissions, hourly workers can multiply their hourly wages by 173 to get their monthly payments.

If you get a lot of overtime or commissions/bonuses, you’ll need to average your W2s from the last few years. Typically, only the latest two years are included. So, for each year, sum up all sources of recorded income and divide by 24.

Self-employed / 1099 people can apply the Profit line (which shows how much money you told the IRS you made) for both years and divide by 24.

Whether you make money by renting a property or a portion of it, you’ll need a valid rental lease and the required municipal permits only to include the rental income at all, because you’ll only be allowed to use a portion of it so lenders would presume there’s a chance of vacancies throughout the future.

If you can’t completely log and check your salary, even if the majority of it comes from commissions, incentives, or self-employment, you will be eligible to qualify on the basis of Stated Income, which allows you to actually state your income to the lender whether you have a high enough credit score (usually 620 or higher, though in some cases as low as 580). People with a guaranteed income, such as social security or a pension, are not eligible for stated income lending programs, which limit the amount of money you can borrow through a cash-out refinance, debt repayment, or purchase loan.

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