How Do You Calculate Qualifying Income for a W-2'd Employee?

Hmmm... this could be complicated.

As a loan officer, I'm responsible to calculate income for the borrower to ascertain whether he/she will have enough income to service new and existing debt on the loan (also known as calculating the DTI) so we can let the borrower know their purchasing power.

The borrower provides a copy of the W-2's for the last two years and paystubs covering the last 30 day period. Also, I will ask for tax returns for the last two years.

I first figure out if the employee is salaried or hourly and how often they are paid. For this I use the following worksheet.

INCOME CALCULATIONS WORKSHEET

Borrower: Employer: 

Start Date: Position: 


___ Borrower is an Hourly Wage Earner 

Hourly rate of pay = $______ x _____ hours per week x 52 weeks divided by 12 months

= $_____________ qualifying income

___ Borrower is Weekly Salaried

Weekly salary rate $________ x 52 weeks divided by 12 months

= $_____________ qualifying income


___ Borrower is Bi-Weekly Salaried (paid every other week or 26 pay periods per year)

Bi-weekly salary rate $______ x 26 pay periods divided by 12 months

= $_____________ qualifying income


___ Borrower is semi-monthly salaried (paid twice monthly such as on the 1st and 15th
or 15th and last day of the month or 24 pay periods per year)

Semi-monthly salary rate $_______ x 24 pay periods divided by 12 months

= $_____________ qualifying income


___ Borrower is Monthly Salaried (paid once per month)
= $_____________ qualifying income

We cannot use more than 40 hours per week unless we can document this is normal, has occurred in the past 24 months and can get a verification from the employer indicating it will continue.  The same is true of bonuses and overtime.

Paystubs show more than just income.  They also show garnishments, child support, court ordered payments, loan payments and 401k contributions among other things.

The tax returns are used to see if there are reoccurring write offs.  For example if you are a sales person and write off unreimbursed expenses such as mileage, meals, etc on a form 2106.  This amount is deducted from the income.  You are now using less income to qualify.

Of course there are as many different scenarios as there are borrowers but this is a short version of the way it's done. With this information in hand you can now have fun and calculate your income to see the difference between what shows on your W-2 and what we consider "qualifying income".