Prequalification calculator tips and tricks

March 02nd, 2011

Are you paid weekly or every other week? Is semi-monthly the same as bi-weekly? One of the most important duties performed by a mortgage professional is to properly prequalify mortgage applicants for new home loans. If you are using a mortgage prequalification calculator to determine your ability to purchase a new home here are some basic income calculation tips to ensure your results are accurate.

Note that your income for mortgage qualifications is always your gross monthly income.

That's gross!

When it comes to financial calculations "gross" does not mean disgusting but total, without any deductions. Your gross pay is your base pay before deductions for taxes, health insurance, retirement contributions or other deductions. For mortgage calculators always use your gross income. How you calculate your monthly income depends on how you are paid:

Hourly pay

If you are paid an hourly wage you will have a few steps to properly calculate your income. You will need to convert your hourly wage to a monthly income. To do this takes a few simple calculations:

  1. Multiply your hourly wage by your weekly hours to get your weekly income. For example, if you make $25 per hour and you work 40 hours, multiply 25 by 40 for a gross weekly income of $1,000 per week.
  2. Multiply your weekly rate by 52 weeks in the year to get your annual income. $1,000 per week times 52 weeks is $52,000 per year.
  3. Divide your annual income by 12 months to get your monthly income. $52,000 divided by 12 months is a monthly income of $4,333 per month.

Weekly pay

A common mistake for those who are paid weekly is to multiply their income by four to obtain their monthly income. Using this method for calculating your income will decrease your qualifying income by over 8 percent. If you are paid weekly, you receive 52 paychecks in a year, or an average of 4.33 per month, not four.

If you are paid weekly, use steps 2 and 3 above to calculate your monthly income for qualifying with the prequalification calculator. If you are paid $1,750 per week:

  1. Multiply your gross weekly income by 52 weeks to get your annual income. $1,750 times 52 weeks is an annual income of $91,000 per year.
  2. Divide your annual income by 12 months to get your monthly income for mortgage qualifying. $91,000 per year divided by 12 months is a monthly income of $7,583.

Bi-weekly pay (every other week)

Similar to multiplying weekly income by four to get monthly income, if you are paid bi-weekly, or every other week, multiplying your gross bi-weekly income by two to get monthly income will cheat you out of some income for qualifying.

If you are paid bi-weekly you need to convert your bi-weekly pay to annual income and then bring it back to a monthly gross income for the prequalification calculator. If you are paid $2,500 every other week:

  1. If you are paid bi-weekly you are paid 26 times in a year. Multiply your bi-weekly income by 26 to get your annual income. $2,500 times 26 is $65,000 per year
  2. Divide your annual income by 12 to get monthly income. $65,000 divided by 12 is $5,417 per month.

Semi-monthly pay (twice per month)

Not a lot of challenge if you are paid twice a month, typically 15th and last day of the month. Simply multiply your gross paycheck income by two to get your monthly income. $2,500 twice per month is $5,000 per month.

Commission

If you are paid commission for your income you will need to use your federal tax returns as filed for the past two years to calculate your qualifying income for a new home loan. Using your tax returns the simple way is to take the gross income off your first page of your federal returns as listed under your Schedule C income (if you are paid W2 from your company see below). If your income in 2009 was $63,500 and your income in 2010 increased to $67,400:

  1. Take the gross income from the last two years, add them together. $63,500 plus $67,400 is $130,900
  2. Divide your total income for the past two years by 24 months to get your average monthly income. $130,900 divided by 24 is $5,454 per month for the prequalification calculator.

But keep in mind that if your commission income was lower in 2010 than in 2009, most lenders will qualify you based on the lower income, not the average.

If you are paid commissions but also receive a W2 for wages then you will need to also use the two year average calculation, however instead of Schedule C income you will use your wages from your W2s. Additionally you need to check to see if you have Unreimbursed Business Expenses, seen on a Schedule A as listed on page two of your federal tax return form 1040. Subtract any such expenses from your annual income before doing your average monthly income calculation.

30 Yr. Fixed - Refinance Rates from Our Lenders in California

Lenders
Rate
APR
Monthly Payment
LoanDepot, LLC
3.750%
3.917%
$695
Quicken Loans
4.500%
4.626%
$761
Rocket Mortgage
4.250%
4.374%
$738
 

Use a calculator

If you are using a prequalification calculator to determine your purchasing power and new home loan, use the proper calculations to determine your income.

Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

 

 

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