Qualifying income

Salaried income is usually the simplest: annual base pay divided by twelve, verified with pay stubs and W-2s. Hourly pay is calculated from the guaranteed hours. Overtime, bonus and commission generally need a history, commonly two years, and are averaged; a declining trend may be discounted or excluded. Self-employment income comes from tax returns, typically averaged over two years with certain non-cash expenses such as depreciation added back. Other income, including Social Security, pensions, alimony or rental income, has its own documentation and continuance rules.

Worked example. A borrower earns $60,000 in base salary, or $5,000 a month. They received $6,000 of overtime last year and $4,800 the year before. Averaging two years gives $10,800 / 24 = $450 a month. Qualifying income is $5,450, not the $5,500 that last year alone suggests. If overtime had dropped sharply, the lender might use only the lower recent figure or none at all.

Self-employed borrowers often see the biggest gap, because write-offs that reduce taxes also reduce qualifying income. Bank statement programs exist partly for that reason. The self-employed income calculator shows a two-year average with common add-backs.