There are many exceptions and guideline criteria on qualifying income as it relates to Conv, FHA, and VA loans so it’s best to email or call me about your situation but as a general rule:
Conventional = 45%
FHA = 55%
VA = 63%
Now, how does an underwriter determine the qualifying income to apply these ratios?
This is very complicated and is at the heart of underwriting and qualifying a mortgage loan. This is what I could be considered an expert in. I know business and personal tax returns inside and out, and I know which programs allow for just one year of self-employment and tax returns and which programs require 2 years.
I know which lenders and underwriters and loan products will use just one week on the job as qualifying income as opposed to the industry standard of 30 days of paystubs. I know which banks and lenders and loan products allow part-time employment, commissions, bonuses, side businesses, fixed incomes, and I know how to use asset-based income to qualify in lieu of a regular documented monthly income.
As a general rule, here is how qualifying income is calculated for some very common types of income:
(below, always use gross income figures, that is, what you are paid before taxes and other deductions are held out)
Base Salaries – annual divided by 12 months = qualifying income (actual salary, not broken down as hourly on a paystub like most employers for tax purposes, true salary just says “regular pay” and does not list hour worked nor an hourly wage, regardless of how consistent or guaranteed it is, if paystub says hourly it’s hourly and must be averaged below)
Hourly –
2012 + 2013 + YTD paystub average monthly
Overtime –
2012 + 2013 + YTD paystub average monthly
Commission –
2012 + 2013 + YTD paystub average monthly
Bonuses –
2012 + 2013 + YTD paystub average monthly
All of this = Qualifying Income
Now, you add all of the qualifying income together for each of you and that gives you your monthly qualifying income factor, it’s a dollar amount.
Now, take 45% of that figure (so, X .45 for all you math fans), because a typical conventional loan allows a 45% Debt Ratio
Now, from that figure, subtract all of your monthly MINIMUM payments as reporting to credit (so if you have an AMEX card and you pay it off every month BUT the last statement you got shows a $1500 balance with a $50 monthly min payment then THAT is the number you must subtract; if you have a student loan that is $150/month you must subtract that number regardless of how much you actually pay each month; car payments; etc. anything that reports to credit will count against your debt-to-income ratio…including your current mortgage, HELOC, HOA, taxes, insurance on the property you already own).
