Loan Officer Training - 11/26/2024 - Calculating Non-Variable W-2 Income

In this episode of Loan Officer Training, we break down the process of calculating non-variable W-2 income to help you assess borrower qualifications with confidence. Learn how to accurately analyze pay stubs, identify consistent income streams, and account for deductions or other factors that might affect qualifying income.

We’ll also share tips for avoiding common mistakes and ensuring compliance with underwriting guidelines. Perfect for new and seasoned loan officers alike, this episode will strengthen your skills in reviewing straightforward employment income scenarios. Tune in to sharpen your expertise!


Join The Mortgage Calculator at https://themortgagecalculator.com/join

About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

Our Mortgage Loan Originators are trained to be loan consultants to guide borrowers throughout the entire loan process. A licensed Loan Officer is only a phon

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as thousands of Non-QM mortgage loan program variations using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as acc...

Transcript

Restream recording Nov 26, 2024 • 05:02:26 PM: 0:13

So what do we mean by non variable income? Right? I was just talking about that. That is income with a predetermined amount that occurs with a regular frequency and has a defined Documentable, documentable term, right? So this is your, your salaried buyer, borrower, excuse me, your hourly borrower, those that you know, they work either, you know, 40 hours every week, 52 weeks a year, they're going to get paid either bi weekly, which means every two weeks. Or they're going to get paid either bimonthly, which is twice a month, or maybe they get paid monthly, or maybe they get paid weekly. For this type of borrower, um, the way to document their income is going to be with pay stubs dated within the last 30 days. of the initial application. W 2s are also usually going to be needed for the prior two years or whatever automated underwriting states. If you're a DU finding state, you only need one year W 2s and that's all you're going to submit with the loan. A written verification of employment. Uh, so you, it, it, it could be the, you know, pay stubs, W 2s, or you could provide the written verification of employment, uh, either from the employee, the employer, excuse me, or from a third party vendor like the work number. And, uh, the verification is going to include the year to date income for the current year, plus the prior year's earnings, 2023. And 2022, depending what you are required to provide according to your automated underwriting findings. And then, of course, prior to closing, at least 10 days. Um, prior to the note date, uh, you're going to need a verbal verification of employment as well. Now, in certain cases, we could have W 2 borrowers where, um, DU may not state that you need tax returns, but the specifics of the case do state, or DU may state it depending on how it was documented on the application. But scenarios where tax returns will Be required are going to be when the employee is employed by family, right? If they're employed by family, the guidelines are a little bit different on the, um, for example, on the agency loans, right? It's going to tell you in that case to use the prior 2 years income. And not to use the year to date income, a little bit of a confusing twist there. But the reason that they say that is because they fear collusion between the borrower and their family member, right? Like they know they're going to get a house now they need to bump their income. So they're going to ask to have their current income. Bumped up, which may or may not be a realistic income amount, uh, may not be the actual one. So in those cases, if you are employed by a family member, they're going to look at the tax returns. They're not going to look at the year to date income. Year to date income may, will be looked at just to note continuity of the income stream, but that's not the income that's going to be used. Tax return is also required when the borrower is employed by an interested party to the transaction. So, for example, if the borrower is employed by the seller, then that, that does happen. You know, um, somebody works for a company, the owner of the company's selling the house, selling a property they own. They say, Hey, I want to buy your property. Sure. Give me a chance. They buy it, put an offer on it. Well, that person is an interested party to the transaction. The seller who also happens to be the employer of the borrower. So you're going to need tax returns for that same scenario with the pay stubs. Now, um, borrow the self employed. That's not, you know, variable income. That's not non variable income, but just letting you know, that is a scenario where you're always going to require tax returns, interest. And dividend income also requires tax returns. Foreign income, in other words, income earned outside of the U. S. that the borrower is declaring in their U. S. tax return, also requires tax returns. And of course, rental income, right? Rental income is documented on the Schedule E, as in Edward. Page one. of the Schedule E because page two of the Schedule E is where the royalties for corporate income go. Now, regarding the actual calculation of the income, this is super important because I find in too many cases that I'm reviewing files and loan officers are using just the W 2 income. For example, I'll ask them, how do you calculate the income? Oh, I grabbed The last two years, W 2s averaged it out, divided by 12, and that's my income. I mean, that's okay if you were looking, for example, a borrower employed by family, and that's what the guidelines tell you to do. But that's not how you would normally calculate the income, non variable income, for a salaried or hourly employee. You would use the year to date income. That is the accurate depiction. Of what the borrower is earning right now at this point in time, right? So if they are not employed by family or by an interest or by an interest reported to the transaction, and they are salaried or hourly employee, then. You would not use the W twos, you would use the year to date income. Now you still do look at the W twos for the continuity of the income, meaning, for example, if they made$60,000 in 20 22 6 and um,$61,000, let's say in 2023. But now in 2024, you're almost at the end of the year, and it doesn't look like they're going to meet, they're going to make the same amount. It looks like they're, you know, 10, 000 less in the year to date income. That's going to be an issue. Because now you have a decline in income. So that's why W 2s are looked at to as a, um, benchmark. And then you look at the year to date and if it's the same or more, you're good. If it's less and you have declining income, depending on the percentage of the income is going to be the severity of the impact to the deal. Right. So, um, how do you calculate the income? Well, the first thing you would do, and this is now one of the assumptions here, of course, when you're looking at this is that the borrower started working at the current employer on January 1st hasn't missed any time. Right? So. You, um, you know, you're going to base it on accurate amounts there. If the borrower started working after January 1st, then definitely a written verification of employment is going to be required to confirm when was the actual start date, you're going to see how many months have elapsed from the start date to the current pay period. And that's how you're going to calculate the year to date income, right? You're going to establish how many days. in the year have passed, right? That's, that's how you would calculate that. So in this example here, we're going to assume that the borrower started working on January 1st. So first thing we have to determine the gross year to date income. So in our scenario here we have John Doe that his year to date, uh, earnings are 900. And, um, we're going, so now once you get the year to date gross income, you also got to note the following. And in some cases these pay stubs can be a little complicated with sick days, paid time off. Vacation and other components of the income. So remember, overtime is a different category, but paid time off, sick days, holidays, and vacation are usually days that they got paid for when they did not work. And that usually means that the, um, earnings for the hours worked or the salary is going to be offset by the vacation and paid time off and, um, you know, those other components there. So you have to get an add. Together, the year to date earnings from their regular pay plus vacation, sick days and other paid time off to get a total amount and then you're going to get that total amount and you're going to divide it by the number of days, um, days. By the time that has elapsed. So, for example, in the calculation that I did there, I calculated that we were in June 16 pay period, which is what it says there on the pay, uh, pay stub pay period is 62 of 06 to 616 of 06. So that means that, um, that is all the earnings that John Doe has earned. Through June 16th, the calendar year. So now, uh, we get 16 days that, um, have elapsed in the month because the pay period was through June 16. That's how much money he made through June 16. So we get the 16 days and we divided by. 30 days because there's 30 days in June and that gives us a 5333 and it's actually 533 repeating into infinity. So, you know, I just cut it off at the fourth decimal point there. And then you get a June. So June 16th in numerical terms is represented by the number 5. 5333 because there's five months have elapsed. Through May, all of May, you know, January, February, March, April, May are complete. And then we got partial has elapsed of June. So 5. 5333 is the numerical representation of June 16th. So then you get the year to date income since our borrower has been working since the beginning of the year. So our year to date income is 900. And we divide that by 5. 5333 and we arrive at our monthly income of 162. and 65 cents. So, that would be our, our, our calculation for the actual year to date income through 6 16, you know, uh, in this case, let's say 2024, right? Uh, you would not, okay, I repeat, you would not get the number of hours times the pay rate, right, You will not multiply that and then assuming that he gets paid. Uh, in this case, he gets paid every two weeks, right? So you would not get that figure multiply it times 26 and divide by 12. That's not what you do. Now you could do that. If you want to establish some type of a benchmark, like what would he have earned? If he worked 40 hours every week, because borrowers simply sometimes do not work 40 hours every week in the whole year. There may be a pay period where they work a few less hours. Maybe that's because of vacation, paid time off, holidays, whatever it may be. And that's where those other categories may come into play. So if you want to do that calculation just to confirm what it would be in the ideal scenario to see if you're over or under in your year to date calculation, but only use that just to compare because that is not the income because you cannot assume that the borrower worked 40 hours every week of the current calendar year. Right. If you do, you're, you're going to be off. Especially if it's a borrower that you see that has a lot of vacation and pay time off and other components there to the pay. He probably has been in training on some other days as well that he didn't get paid for on the hourly, got paid for through the training, uh, cost code. Let's just put it that way. So really important year to date income is the key and we only use the W 2s. To, uh, confirm the continuity of the income to see if it's the same or if it has decreased. So that's it for, uh, calculating the income, uh, for non variable income borrowers. I'm gonna give it a minute, um, to see if there's any questions. I know I was pretty, uh, detailed and thorough on this, but just want to see if there's any questions. No questions from anyone. Alright, so I do look forward to seeing you in, uh, tomorrow's training. Thank you and have a great day.