For the last few weeks, I have been explaining how to calculate income for people who are self employed. This includes anyone who owns a sole proprietorship, LLC, C-Corp, S-Corp, or is a member of a partnership. And now that I have covered that, I thought it might be a good idea to explain how we calculate income for a wage earner, as it is not always as cut and dry as you might think.

The first piece of any wage earner’s income calculation is the W-2. This will show how much gross income a wage earner earned from their company for the year. But this does not always differentiate overtime, bonuses, and commissions from salary or hourly pay. And while you might make $150,000 in W-2 income, if half of it comes from bonus and overtime, it might not all qualify as income for the purposes of getting a mortgage.

Any bonus, commission, or overtime income must be declared separately from salary income and must be sustained for the prior two years. So if you got a promotion last year and your bonus structure doubled, you won’t be able to use that as income to buy a new home. Similarly, if you recently changed companies but stayed in the same profession, you can qualify for a mortgage for the income you earn in hourly wages, but not in overtime as there will not be 2 years’ history.

To help us calculate your true salary/hourly earnings, the underwriters will request a copy of your last paystub to review it. This will usually help us determine what income qualifies and what income does not qualify.

Finally, you need to figure out if you have any other income sources. This could be dividend income, social security, lottery earnings, unemployment, etc., and whether or not this specialty income will qualify. To do this, you will probably want to contact a mortgage specialist who can analyze your annual income with you.

If you have any questions about how to calculate the income of a wage earner, please contact me. And if you have anything to add about calculating income for a wage earner, please leave a comment.