July 9, 2024 • 33 mins
In this episode of Loan Officer Training, we dive deep into the essential skill of calculating W-2 wage income. Accurate income calculation is critical for loan officers, as it ensures that borrowers are qualified correctly and helps maintain the integrity of the lending process.
Join us as we break down the step-by-step process of interpreting W-2 forms, understanding gross and net income, and identifying any additional income factors that could impact the borrower’s financial profile.
Whether you're new to the field or looking to refine your skills, this episode will provide you with the knowledge and confidence to accurately assess W-2 wage income for your clients. Tune in and elevate your loan processing expertise!
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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!
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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!
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Restream recording Jul 09, (00:00):
And get it started.
(00:04):
All right.
Good evening, everybody.
Thank you for joining us fortonight's training.
Like Kyle said, getting back tothe basics here, but we are
seeing an increase in our agencyloans.
Especially a lot of the full doctype loans.
We're seeing a lot of FHApurchase loans come through the
(00:26):
pipeline as well.
So definitely never a good atime as now to, get back to the
basics, make sure we'recalculating those full doc files
properly, especially our W2borrowers.
So.
How to calculate W2 wage income.
(00:49):
Now we're gonna break it downbecause wages can come from a
lot of places and you're stillgonna get a W2, right?
So we're gonna go beyond the,cookie cutter type of a scenario
here, and let's break it down.
What are the types of W2 wageincome, right, as opposed to
(01:12):
some of the other income types.
That, we have, discussed in thepast, right?
Like non, employment typeincome.
W 2 wage income is just theopposite.
This is from a job, right?
This is not from selfemployment.
This is not from retirement.
(01:33):
This is not pension plans.
This is not interest income.
This is earnings from working,right?
You're an employee and youremployer reports the earnings
that they pay to you via form W2 and most importantly on a W 2
(01:56):
basis.
income type job, the employerwithholds the payroll taxes,
right?
If not, then it's not a W 2,it's probably a 1099, that's a
gross income, and the borroweris responsible for their payroll
taxes.
(02:16):
And as with all W 2 income typejobs, We, analyze the borrower's
income based on the gross, thegross income pre tax, right?
The pre tax income.
Sometimes borrowers, when we'reasking them what they, what
their income is, the borrowerstend to report the, their net
(02:37):
income because that's what theylook at to make the payments.
But we analyze it based on theirpre tax income.
So then our W 2 borrowers couldbe salaried.
Right, where they have a setsalary and it's just divided by
however many pay periods theyget paid in, but it should be
(03:00):
the same amount regardless of ifthey work more or they work less
time.
It is set.
So if they get paid once amonth, right, then their income
is going to be their annualsalary divided by 12.
If they get paid twice a month,right, that's 24 pay periods, it
(03:23):
would be their income, annualincome, divided by 24 and then
times two to get the monthly.
And then if it's, if they getpaid bi weekly, then it's 26,
right?
So twice a month, it's 24 payperiods, If they get paid every
two weeks, it's 26 pay period.
(03:45):
So that's one of the key thingsthat sometimes people make a
mistake.
However, don't just rely onlooking as we're going to
discuss in a minute.
Don't just rely on looking atwhat their base pay is, assuming
that they've worked all the timethat they should have worked in
the year, assuming that eventhat salaried person didn't take
(04:06):
a sabbatical or something, orthey just took some unpaid leave
so that they could do somethingelse.
Or maybe they had a maternityleave for, or, or paternity
leave, right?
And they're getting paid, theygot paid a reduced amount.
Throughout the year.
So we always have to look at theyear to date income, which I'm
going to break that down alittle bit.
(04:27):
That's the main gist of thispresentation as we move on.
And then we have commission.
So W2 income can be salary.
Can be hourly or can becommissioned where the
individual is paid by productionor paid per job but they still
get a W 2, right?
And you just have to calculatethe income differently based on
(04:51):
past performance, all right?
Because that's how it is.
It's going to be averaging,maybe you have a one year
finding or a one year incomeprogram that you're selecting,
maybe you have a two yearfindings.
or a two year income program onnon QM that you're selecting
because it's better pricing,right?
But it's still W 2 income, itjust happens to be commission.
(05:12):
And that's a confusion, causesconfusion sometimes, right?
Because you see somebody that iscommissioned and you assume that
that's like a whole different,Ballgame.
Well, it's variable income iswhat it is, but it's still W 2
wage income.
And as always on the salariedand on the hourly income types,
(05:34):
you always have to take intoconsideration variable income,
especially for salaried income.
Borrowers, you're looking atbonuses really?
Cause they don't have overtime,right, but they do have bone and
it doesn't vary depending on thetime that they work, but they do
have bonuses.
Bonuses may be applicable.
And on your hourly.
(05:54):
Worker, definitely you have tolook at that year to date
because they could be workingdifferent hours, different
weeks.
They could have some time offagain.
Like I mentioned that theydidn't get paid for, and that's
going to mess up yourcalculations.
If you simply go to the pay stuband say, oh yeah, they work 40
hours a week.
Times 20 an hour, they make 800a week time and oh yeah, on
(06:18):
their pay period, they get paidevery two weeks, so I'm going to
multiply that times 26, divideby 12, and I'm going to get my
monthly income, but you didn'tlook at the year to date, taking
into consideration factors like,you know, Working less hours, a
raise, taking time off.
And that's why I break that downhere in the challenges that are
(06:39):
faced with W 2 incomeverification, right?
Even in a W 2 income file,downward trending income is a
problem, right?
Especially if you're looking ata borrower where you're, you're
looking at the two year, Incomebecause you've got a finding for
(07:00):
two years and now you realizethat the current income is 40%,
50 percent lower than it waslast year.
That could be a serious issue.
That's definitely going to haveto be explained and especially
going to be an issue.
If your borrower is hourly now,maybe they're getting a lot less
(07:21):
hours and that, and that trendcould be continuing.
Maybe the business is havingissues, right?
They're in a retrenchment mode,cutting back on everything.
Are they going to have morecutbacks next year?
Those are all things that anunderwriter is probably going to
ask you to document, but itespecially poses an issue when
you have a variable incomecomponent that makes up a good
(07:46):
amount.
Of their income for the year.
Like overtime, I've seen, someborrowers and this is, let's
say, especially so with nurses,right?
Nurses tend to have the mostcomplicated pay stub of our W 2
borrowers.
There's all different types of,entries in the pay stubs and
then all different types ofovertime, where a lot of times
(08:07):
the overtime income of a nurse.
Year to date is greater thantheir base income, right?
So you have to be very carefulon how you document that, which
we'll be providing somesolutions in the coming slides.
But It's very important to notethat when you have a downward
(08:28):
trending income, you cannotaverage the higher prior income
with the lower current incomewhen a two year average is
required.
So what do I mean by that?
Well, assuming 2022, theborrower had a hundred thousand
(08:49):
dollars In an overtime 2023, theborrower had 25, 000 in
overtime.
Now you're going to see a yearto date overtime figure
hopefully on the pay stub aswell so that you can even use
the overtime.
But at that point, you're goingto have to use that 2023
(09:13):
overtime only because that's thelower of the two figures.
You can't average the higherprior with the higher current.
And then you're Your currentovertime has not yet been
reported to the IRS.
So you're probably not going tobe able to add that.
To bump up your average.
(09:36):
So you're almost going to bestuck unless there's some
seriously good documentation inthe verification, the written
verification of employment whereyou get some nice remarks.
From the employer that, yeah,the reason why overtime was
lower in 2023 was because of X,maybe they had a difference in
(09:56):
their, how they calculatedpayroll or how they set it up.
And now 2024, we're back to now,you know, how we were before.
And if you have a year to date2024, that's substantially
higher than 2023, then you maybe able to document.
I'm throwing in the monthlyaverage, like a weighted average
(10:17):
of the year to date into the mixto help your overtime.
But the gist here is that youcan add average the higher prior
with the, with the lower currentand have that figure.
In other words, 125, 000 dividedby 2 is what?
62, 500.
That's much higher than 25, 000,which is what it would be.
(10:37):
You know, looking at thescenario I just pointed out, and
other challenges that thedocumentation must support a
history of receipt and theamount, frequency, and duration
of the income type.
Again, especially important withvariable income, where a minimum
(10:59):
history of two years isrecommended.
And this is also going to comeinto play, you know, with
continuity and the trend.
But here we're talking about, isit every two weeks that you're
getting that bonus?
Is it every three months?
Is that something that's goingto continue, right?
Because they put that remark,you can ask them, the employer,
(11:21):
to put that remark.
on a written VOE when it'sactually completed by a human
being, poses an issue where youneed then to find workarounds
because most of the time nowthose written verifications of
employment are not completed bya human being, in which case you
may be able to reach out totheir payroll or human resources
(11:43):
and tell them why you needsomebody in HR actually to
complete the form because youneed that comment or maybe
they're willing to write aletter.
on their company letterhead fromhuman resources stating when
they receive the, the, the raiseor why the variation to the
income to the frequency durationand amount of the income.
(12:09):
And then we're talking aboutcontinuity of the income, right?
Is it the same as last year?
And this is why it's soimportant, to use year to date,
the year to date figures on thepay stubs and not the W2s.
(12:29):
You don't really average the2022 and 2023 W2 income along
with the pay stubs.
For the current year to date,because the pay stubs current
year to date are what's reallygoing to determine our, our
borrower's current incomesituation.
(12:50):
However, I will state there's anexception to this where you
average out the prior two years,W 2s and do not use the year to
date pay stubs, and we justrecently encountered this
situation.
That's why it's so fresh in mymind, is when you have a
borrower that's employed by afamily owned Business, right?
(13:15):
So if it's obvious and disclosedthat the borrower is employed by
their, by their parents or theiruncle, or, you know, some type
of, you know, directly relatedfamily member, then you really
have to look at the guidelinesbecause on agency loans, for
example, on conventional FHA andthe like, you are not allowed to
(13:40):
use the year to date currentincome on the pay stub, and
you're only allowed to use.
the average of the last twoyears.
W two.
Now, obviously the can't averagedeclining values comes into
play.
So at that point, if it's alower 2023 than 2022, you'd be
using the 2023 W two, but youwould not use the year to date
(14:02):
pay stubs.
But remember, this is only whenthe borrower is employed by a
family owned by a by a familymember.
So let's talk about solutions,right?
We love solutions here at themortgage calculator.
Now, obviously we're talkingfull doc here, because remember,
(14:23):
if we can't resolve.
These issues that we may have,these challenges that we may
have with our W 2 wage incomeborrower, we have other
solutions, right?
A CDFI loan, which is a noincome verification type loan
for primary and second homes,right?
(14:44):
Which is totally different froma DSCR, which is for an
investment property only.
So the CDFI option that we haveis, the only, no income
verification loan out there forprimary homes.
So if you have a, and obviouslyyour W2 income borrower is not a
self employed borrower becausebeware, you could have borrowers
(15:08):
that are self employed and paythemselves and a wage, but that
borrower is not a W2 borrower.
You calculate that borrower'sincome.
You're going to use the selfemployed borrower income
calculator.
You're going to put the W 2income as one of the income
categories in that self employedborrower income calculator.
(15:30):
And then you're going tocalculate the other categories
as well.
So this is for a pure W 2borrowers that are employees of
somebody other than a companythat they themselves are a
majority owner.
So what are some of oursolutions for documenting
receipt of our W 2 income?
Well, some of these are prettyobvious, right?
Like the first one.
(15:51):
updated pay stubs from the last30 days to calculate the year to
date income.
In this scenario, you will stillbe required, to complete a
verbal verification ofemployment to confirm that the
borrower is still employed.
Another solution is, andcomponent of documenting the
(16:16):
receipt of the income is W 2sfrom the last two years.
But not the average amount andadd to the income, but to
determine if the income trend isStable remember I mentioned
declining income trend howyou're gonna know if it's
declining if you don't look atthe prior year or the prior Two
years, so you definitely want tolook at the w 2s to see if you
(16:37):
have a stable income trendIncreasing orbits declining.
Now our favorite tool and theone that you should probably
employ as soon as you determinethat you have.
Issues in being able to documentyour W2 wage income, like, you
(16:59):
know, the variable income is allover the place.
You can't figure it out.
You got those complicated paystubs.
So, again, the writtenverification of employment form
is going to confirm the startdate.
of the borrower.
So in case they started sometimeduring the year, not on January
(17:20):
1st, you're going to need thatstart date to then be able to
calculate the pro rated year todate earnings, right?
The rate of pay is also going tobe, documented on the written
verification of employment form.
The year to date earnings, theyear to date earnings of their,
(17:43):
what is considered.
Base pay, right?
This is where some of thosecomplicated pay stubs, issues
can be resolved with theverification of employment,
because they're going to tellyou this is the base pay and
that's where they're going toinclude.
All of those differentcategories that you didn't
really know what they were.
Well, they consider them basepay if they put them in there
(18:06):
and that's pretty cut and dry.
At that point, then you're goingto have overtime and you're
going to have bonuses andcommissions should also be
broken out on this writtenverification of employment form.
So now we have a borrower who'sbeen two years or three years at
that employer.
It's going to be nice and easybecause you just get one form.
(18:29):
They fill it out and it's goingto break out your variable, your
base income and your variableincome for the last two years
plus year to date.
And then you can do youraverages that you need to do,
which is required for all of thevariable income types.
And then very importantly, any,any promotions, any earnings
(18:49):
increases, raises, stuff likethat.
That will be documented also inthe written verification of
employment form.
Again, this is if it's completedby a human being, because if
it's completed by the worknumber, they don't add any extra
comments.
And then you're going to have toreach out, to HR for the last
bullet point there is for aletter of explanation.
(19:11):
Regarding the either the pasteof entries, what they are or
regarding the when was the thepromotion, what was the date
that their earnings, wereincreased, right?
The date of the promotion.
So that then you're going tohave, if it's a W two employee,
That is, you know, notcommission or bonuses.
(19:35):
Then you're going to use the newhigher amount off the bed.
You don't have to average theprior.
Year to date with the currentyear to date.
If they're W2, they're W2.
If this is base income, this isbase income, and you can use a
hundred percent of the higheramount of the base income.
(19:55):
Again, as long as it's notvariable income.
'cause then if it's variableincome, they could have gotten
an increase in the percentage ofcommission that they get on each
deal throughout the middle ofthe year, in the middle of the
year.
But that's not gonna change youraverages.
Right?
That's not gonna change the2022.
That's not going to change the2023, which may be what you may
(20:15):
have to use for yourcalculations.
So again, note how important itis, to take these matters into
consideration and how you shouldorder that written verification
of employment.
You don't have to wait till theunderwriter requests it.
You're analyzing the pay stubs.
Borrow submitted theapplication, you're getting it
(20:37):
ready to submit and you realize,well, no, this is all over the
place here.
Oh, wow.
This nurse.
I don't know what any of theseentries are request a written
verification of employment pindown the O.
T.
and the base pay and the timeoff and you'll be okay.
So now I'm gonna break it downfor you here in our last slide
here, because you've beenhearing me talk about year to
(20:58):
date, year to date, year todate.
You know, so I, grabbed a samplepaste of there.
This is our borrower, John Doeyear to date.
He's made 900.
So maybe there's a paste up fromlike 1950 or something like
that.
When, when, if this was, Juneand you, you know, we'll
(21:20):
calculate the income in aminute, but, the income there
that that's going to end upcalculating would have been a
lot of money back then.
But right now it could be like apart time, part time, part time,
part time, part time job.
Right.
But let's break it down.
So important components here,pay period.
The pay period is.
June 2nd.
16.
(21:40):
So, Mr.
Doe is getting paid, twice,every two weeks.
That's 14 days.
So there's going to be 26 payperiods there.
I will.
So we'll see if we need that.
And then, That's their pay rate.
Number of hours, all that kindof stuff.
(22:01):
Now, he probably has startedworking a little bit later in,
you know, not on January 1st,but we don't really know that.
So for the example here of theexercise, we're just going to
assume that John Doe startedworking on January 1st, right?
Because what we're really doinghere is the exercise on how to
(22:23):
calculate the, base income.
The income using year to date,right?
So, you know, it's, 6, 16 is thepay date, right?
So that's for, for incomeactivity, through for almost
half of the month.
Right.
So what do we do here?
Well, first we determined thegross year to date income in
(22:47):
this case.
900.
Now, if it was a morecomplicated pay stub, the
borrower may have holiday thathe got paid for vacation time
that they got paid for sick daysand other paid time off.
And once you confirm that that'swhat that is, you would add all
(23:07):
of that income to the, base pay.
To, to arrive at a total year todate.
So assuming that John Doe, his,his income, I'm here, his income
doesn't have any holidayvacation, sick days, so we're
just using 900.
But if it did have othercomponents like that, you would
add it to the base pay to get,the year to date adjusted with
(23:32):
all of the earnings that aren'tvariable income, then, you would
determine the number of monthsthat.
The borrower has worked, right?
So here we are 16 days intoJune.
So five months have passed.
and 16 days, right?
(23:53):
So we get 16 days divided by 30days, which is the number of
days in June, and that gives us0.
5333, and it repeats way outthere.
So depending where you want tocut it off, I cut it off at the
fourth decimal point there, 0.
5333, that's 16 divided by 30,and plus five months had already
(24:16):
elapsed in complete monthsbecause, you know, we're in
June, so that's Five plus, the0.53.
Three three means that we have atotal of 5.5 3, 3 3 months.
That have been worked to haveearned the year to date earnings
(24:38):
of$900.
So the next step, prettyelementary, right?
We get the$900 year to dateearnings, year to date, divide
that by five point.
Five, three, three, three.
And you arrive at Mr.
(25:00):
John Doe's monthly income of 162and 65 cents.
Right?
So again, that's, this isassuming that Mr.
John Doe has worked the completeyear in this scenario here.
It looks like, you know, if he'sbeen, if, if assuming he would
(25:23):
have worked 50 hours.
Yeah, because that says thisperiod, you know, 50 hours times
nine is 450.
Then it'd be a different story.
This would be his firstpaycheck, right?
This would be his firstpaycheck, and then you would do
the math in reverse.
But, usually that wouldn't beenough for us to calculate the
income because we need at least30 days worth of pay stubs.
(25:47):
To calculate the income.
Right.
So here, mainly this is just atraining example to show you and
illustrate that what we use toaccurately calculate the
borrower's income is the year todate figure.
So please, and this example is avery simple pay stub, but please
take into consideration ifthere's overtime, now you're
(26:09):
talking about needing to averagethe prior year or the prior two
years overtime, the same forbonuses.
The same for any commissions orany other type of variable
income.
So I hope everything, is clear.
And that, you know, you get alot of those full dock borrowers
(26:30):
and reach out to the mortgagecalculator for your W two wage
and income borrower loans.
All right.
Thank you, Jose.
Looks like we do have a questionhere.
I think we can go ahead and pullit up on the screen.
The question is, when do you usethe two year average as opposed
(26:50):
to the year to datecalculations?
Well, okay, I mentioned the oneexception where you, you're only
allowed to use the two yearaverage when the borrower works
for a business owned by theirfamily, right?
Okay.
That's a non arms linkstransaction.
And then there's going to berestrictions there of only using
(27:11):
the two year average on the W 2sand not being able to use any
year to date information.
However, in situations otherthan that, you would use the two
year average if, if yourborrower is pure variable
income, right?
Not.
Not, you know, mainly, baseincome with salary hourly and
(27:36):
then maybe some variable income,so then you would have year to
date for the base income.
That's not variable.
And then depending on the loantype.
That you're that you have, youwould use the one of the two
year.
Now, for example, FHA loans arealways going to require two
years of income on all of theirfindings, but on on conventional
(28:00):
loans, sometimes you get a oneyear income findings, but what's
going to happen is that when youwhen you tag the income and
you're up in your loan,Operating in your loan system
and your application as this isbase pay.
This is commission, and this isbonuses.
(28:21):
Automated underwriting is goingto pick up on that.
And then it's going to say, youknow, the income of this
borrower needs to be documentedby, and it may nine times out of
10 asks for a two year finding.
So I have a loan now where Ihave two borrowers.
One borrower is commissionbased.
(28:41):
I'm actually a loan officer.
The other borrower is, salary, Ibelieve, and works at a bank.
So my findings required thesalaried person to only provide
one year's W 2 and 30 days worthof pay stubs, and the commission
borrower, who's W 2, by the way,but he's commissioned, has to
(29:03):
provide two years.
Of tax returns, you know, so yougot to see what type of program
if you're going non QM, you'regoing to pick your program and
you're going to go with either aone year income option or a two
year income option, in whichcase you may be asked by
(29:23):
underwriting to provide aletter.
From an accountant, for example,that the, that income trend is
going to continue, but you wouldonly have to provide one year.
So, you know, you see how thatworks with your self employed
borrowers.
All right.
(29:45):
Looks like another questionhere.
Would you consider future wageincrease or future bonus?
No, not exactly, but yes, in away, right?
If a person has a contract, forexample, that, on a job that
they just, that they got hired,right?
(30:06):
Now you do have to look at theguidelines because they may, you
know, they have the contract andthen you can get the
verification of employment fromthe employer, then you may be
able to make it work.
But, typically, you know,bonuses or wage increases that
you may get in the future, anamount that's going to be higher
(30:30):
than an amount that's currentlybeen earned is going to be very
difficult to document.
Now, what you may be able to getin the in the remarks section of
a written VOE where the employercan write.
In some comments that it islikely, you know, like one of
the questions is, is it likelyto continue?
Right.
And then they can check yes.
And then they can write someadditional comments in box
(30:52):
number 20, where they can expandon what they meant by yes.
But that's yes of this currentamount.
That may be higher than theprior amount or maybe you don't
have the two years and that'swhat you're trying to to get
that you're going to havecontinuity of the variable
income components so that theycan even use it because variable
(31:13):
income needs two years.
But this is on agency loanguidelines.
If you read, for example, FannieMae guideline, it says we need
two years, but we may considerone year.
but less than two years.
And at that point, it's thosewritten VOEs and extra
documentation from the employerthat's going to allow you to
capture that variable income,but not necessarily bump it up
(31:35):
because next year is going to beeven higher.
Now, you're going to have towait for next year to come about
to be able to capture thathiring.
All right.
Last question here.
Do you compute variable incometogether with the base income
and average it or averageseparately?
They would be done separately.
So the base income isn't reallygoing to be averaged, right?
(31:59):
It's going to be what it is.
What's going to be averaged thenis the variable.
Let's go with confirmed, right?
We're confirming the base andwe're calculating the variable,
right?
Correct.
Yes.
So the, the variable will beaveraged and then you add the
two together and yourapplication, that's what you
(32:19):
have.
Base pay, and then commission,overtime, bonuses, and other in
the category there.
The other would be stuff likeautomobile allowance, right?
That's the way I like to phraseit too, guys.
Remember, base, we're confirmingthe base.
That's why we're doing all thecalculations, because we're
going to reduce what we think isthe base if our year to dates
(32:41):
aren't aligning with what wethink, right, Jose?
It's more of Confirming and ifit hits great, if it doesn't
quite hit, we're going to reduceit a little bit.
The, it's kind of the oppositewith variable, right?
We have to prove every dime andaverage it over time, rather
than just trying to make surethat it's on track, different,
things there.
(33:02):
All right.
I don't see any more questions.
Let's go ahead and wrap it up.
Remember we do this at 7 p.
m.
Eastern time every Tuesday,Wednesday, and Thursday evening,
where we go through a new loanofficer training topics.
We'll be back tomorrow with anew topic and we appreciate
everybody tuning in.
See you tomorrow, 7 p.
m.
Eastern.
For the next episode of the LoanOfficer Training Series with the
Mortgage Calculator.
Have a great night, everyone.
And get it started.
(00:04):
All right.
Good evening, everybody.
Thank you for joining us fortonight's training.
Like Kyle said, getting back tothe basics here, but we are
seeing an increase in our agencyloans.
Especially a lot of the full doctype loans.
We're seeing a lot of FHApurchase loans come through the
(00:26):
pipeline as well.
So definitely never a good atime as now to, get back to the
basics, make sure we'recalculating those full doc files
properly, especially our W2borrowers.
So.
How to calculate W2 wage income.
(00:49):
Now we're gonna break it downbecause wages can come from a
lot of places and you're stillgonna get a W2, right?
So we're gonna go beyond the,cookie cutter type of a scenario
here, and let's break it down.
What are the types of W2 wageincome, right, as opposed to
(01:12):
some of the other income types.
That, we have, discussed in thepast, right?
Like non, employment typeincome.
W 2 wage income is just theopposite.
This is from a job, right?
This is not from selfemployment.
This is not from retirement.
(01:33):
This is not pension plans.
This is not interest income.
This is earnings from working,right?
You're an employee and youremployer reports the earnings
that they pay to you via form W2 and most importantly on a W 2
(01:56):
basis.
income type job, the employerwithholds the payroll taxes,
right?
If not, then it's not a W 2,it's probably a 1099, that's a
gross income, and the borroweris responsible for their payroll
taxes.
(02:16):
And as with all W 2 income typejobs, We, analyze the borrower's
income based on the gross, thegross income pre tax, right?
The pre tax income.
Sometimes borrowers, when we'reasking them what they, what
their income is, the borrowerstend to report the, their net
(02:37):
income because that's what theylook at to make the payments.
But we analyze it based on theirpre tax income.
So then our W 2 borrowers couldbe salaried.
Right, where they have a setsalary and it's just divided by
however many pay periods theyget paid in, but it should be
(03:00):
the same amount regardless of ifthey work more or they work less
time.
It is set.
So if they get paid once amonth, right, then their income
is going to be their annualsalary divided by 12.
If they get paid twice a month,right, that's 24 pay periods, it
(03:23):
would be their income, annualincome, divided by 24 and then
times two to get the monthly.
And then if it's, if they getpaid bi weekly, then it's 26,
right?
So twice a month, it's 24 payperiods, If they get paid every
two weeks, it's 26 pay period.
(03:45):
So that's one of the key thingsthat sometimes people make a
mistake.
However, don't just rely onlooking as we're going to
discuss in a minute.
Don't just rely on looking atwhat their base pay is, assuming
that they've worked all the timethat they should have worked in
the year, assuming that eventhat salaried person didn't take
(04:06):
a sabbatical or something, orthey just took some unpaid leave
so that they could do somethingelse.
Or maybe they had a maternityleave for, or, or paternity
leave, right?
And they're getting paid, theygot paid a reduced amount.
Throughout the year.
So we always have to look at theyear to date income, which I'm
going to break that down alittle bit.
(04:27):
That's the main gist of thispresentation as we move on.
And then we have commission.
So W2 income can be salary.
Can be hourly or can becommissioned where the
individual is paid by productionor paid per job but they still
get a W 2, right?
And you just have to calculatethe income differently based on
(04:51):
past performance, all right?
Because that's how it is.
It's going to be averaging,maybe you have a one year
finding or a one year incomeprogram that you're selecting,
maybe you have a two yearfindings.
or a two year income program onnon QM that you're selecting
because it's better pricing,right?
But it's still W 2 income, itjust happens to be commission.
(05:12):
And that's a confusion, causesconfusion sometimes, right?
Because you see somebody that iscommissioned and you assume that
that's like a whole different,Ballgame.
Well, it's variable income iswhat it is, but it's still W 2
wage income.
And as always on the salariedand on the hourly income types,
(05:34):
you always have to take intoconsideration variable income,
especially for salaried income.
Borrowers, you're looking atbonuses really?
Cause they don't have overtime,right, but they do have bone and
it doesn't vary depending on thetime that they work, but they do
have bonuses.
Bonuses may be applicable.
And on your hourly.
(05:54):
Worker, definitely you have tolook at that year to date
because they could be workingdifferent hours, different
weeks.
They could have some time offagain.
Like I mentioned that theydidn't get paid for, and that's
going to mess up yourcalculations.
If you simply go to the pay stuband say, oh yeah, they work 40
hours a week.
Times 20 an hour, they make 800a week time and oh yeah, on
(06:18):
their pay period, they get paidevery two weeks, so I'm going to
multiply that times 26, divideby 12, and I'm going to get my
monthly income, but you didn'tlook at the year to date, taking
into consideration factors like,you know, Working less hours, a
raise, taking time off.
And that's why I break that downhere in the challenges that are
(06:39):
faced with W 2 incomeverification, right?
Even in a W 2 income file,downward trending income is a
problem, right?
Especially if you're looking ata borrower where you're, you're
looking at the two year, Incomebecause you've got a finding for
(07:00):
two years and now you realizethat the current income is 40%,
50 percent lower than it waslast year.
That could be a serious issue.
That's definitely going to haveto be explained and especially
going to be an issue.
If your borrower is hourly now,maybe they're getting a lot less
(07:21):
hours and that, and that trendcould be continuing.
Maybe the business is havingissues, right?
They're in a retrenchment mode,cutting back on everything.
Are they going to have morecutbacks next year?
Those are all things that anunderwriter is probably going to
ask you to document, but itespecially poses an issue when
you have a variable incomecomponent that makes up a good
(07:46):
amount.
Of their income for the year.
Like overtime, I've seen, someborrowers and this is, let's
say, especially so with nurses,right?
Nurses tend to have the mostcomplicated pay stub of our W 2
borrowers.
There's all different types of,entries in the pay stubs and
then all different types ofovertime, where a lot of times
(08:07):
the overtime income of a nurse.
Year to date is greater thantheir base income, right?
So you have to be very carefulon how you document that, which
we'll be providing somesolutions in the coming slides.
But It's very important to notethat when you have a downward
(08:28):
trending income, you cannotaverage the higher prior income
with the lower current incomewhen a two year average is
required.
So what do I mean by that?
Well, assuming 2022, theborrower had a hundred thousand
(08:49):
dollars In an overtime 2023, theborrower had 25, 000 in
overtime.
Now you're going to see a yearto date overtime figure
hopefully on the pay stub aswell so that you can even use
the overtime.
But at that point, you're goingto have to use that 2023
(09:13):
overtime only because that's thelower of the two figures.
You can't average the higherprior with the higher current.
And then you're Your currentovertime has not yet been
reported to the IRS.
So you're probably not going tobe able to add that.
To bump up your average.
(09:36):
So you're almost going to bestuck unless there's some
seriously good documentation inthe verification, the written
verification of employment whereyou get some nice remarks.
From the employer that, yeah,the reason why overtime was
lower in 2023 was because of X,maybe they had a difference in
(09:56):
their, how they calculatedpayroll or how they set it up.
And now 2024, we're back to now,you know, how we were before.
And if you have a year to date2024, that's substantially
higher than 2023, then you maybe able to document.
I'm throwing in the monthlyaverage, like a weighted average
(10:17):
of the year to date into the mixto help your overtime.
But the gist here is that youcan add average the higher prior
with the, with the lower currentand have that figure.
In other words, 125, 000 dividedby 2 is what?
62, 500.
That's much higher than 25, 000,which is what it would be.
(10:37):
You know, looking at thescenario I just pointed out, and
other challenges that thedocumentation must support a
history of receipt and theamount, frequency, and duration
of the income type.
Again, especially important withvariable income, where a minimum
(10:59):
history of two years isrecommended.
And this is also going to comeinto play, you know, with
continuity and the trend.
But here we're talking about, isit every two weeks that you're
getting that bonus?
Is it every three months?
Is that something that's goingto continue, right?
Because they put that remark,you can ask them, the employer,
(11:21):
to put that remark.
on a written VOE when it'sactually completed by a human
being, poses an issue where youneed then to find workarounds
because most of the time nowthose written verifications of
employment are not completed bya human being, in which case you
may be able to reach out totheir payroll or human resources
(11:43):
and tell them why you needsomebody in HR actually to
complete the form because youneed that comment or maybe
they're willing to write aletter.
on their company letterhead fromhuman resources stating when
they receive the, the, the raiseor why the variation to the
income to the frequency durationand amount of the income.
(12:09):
And then we're talking aboutcontinuity of the income, right?
Is it the same as last year?
And this is why it's soimportant, to use year to date,
the year to date figures on thepay stubs and not the W2s.
(12:29):
You don't really average the2022 and 2023 W2 income along
with the pay stubs.
For the current year to date,because the pay stubs current
year to date are what's reallygoing to determine our, our
borrower's current incomesituation.
(12:50):
However, I will state there's anexception to this where you
average out the prior two years,W 2s and do not use the year to
date pay stubs, and we justrecently encountered this
situation.
That's why it's so fresh in mymind, is when you have a
borrower that's employed by afamily owned Business, right?
(13:15):
So if it's obvious and disclosedthat the borrower is employed by
their, by their parents or theiruncle, or, you know, some type
of, you know, directly relatedfamily member, then you really
have to look at the guidelinesbecause on agency loans, for
example, on conventional FHA andthe like, you are not allowed to
(13:40):
use the year to date currentincome on the pay stub, and
you're only allowed to use.
the average of the last twoyears.
W two.
Now, obviously the can't averagedeclining values comes into
play.
So at that point, if it's alower 2023 than 2022, you'd be
using the 2023 W two, but youwould not use the year to date
(14:02):
pay stubs.
But remember, this is only whenthe borrower is employed by a
family owned by a by a familymember.
So let's talk about solutions,right?
We love solutions here at themortgage calculator.
Now, obviously we're talkingfull doc here, because remember,
(14:23):
if we can't resolve.
These issues that we may have,these challenges that we may
have with our W 2 wage incomeborrower, we have other
solutions, right?
A CDFI loan, which is a noincome verification type loan
for primary and second homes,right?
(14:44):
Which is totally different froma DSCR, which is for an
investment property only.
So the CDFI option that we haveis, the only, no income
verification loan out there forprimary homes.
So if you have a, and obviouslyyour W2 income borrower is not a
self employed borrower becausebeware, you could have borrowers
(15:08):
that are self employed and paythemselves and a wage, but that
borrower is not a W2 borrower.
You calculate that borrower'sincome.
You're going to use the selfemployed borrower income
calculator.
You're going to put the W 2income as one of the income
categories in that self employedborrower income calculator.
(15:30):
And then you're going tocalculate the other categories
as well.
So this is for a pure W 2borrowers that are employees of
somebody other than a companythat they themselves are a
majority owner.
So what are some of oursolutions for documenting
receipt of our W 2 income?
Well, some of these are prettyobvious, right?
Like the first one.
(15:51):
updated pay stubs from the last30 days to calculate the year to
date income.
In this scenario, you will stillbe required, to complete a
verbal verification ofemployment to confirm that the
borrower is still employed.
Another solution is, andcomponent of documenting the
(16:16):
receipt of the income is W 2sfrom the last two years.
But not the average amount andadd to the income, but to
determine if the income trend isStable remember I mentioned
declining income trend howyou're gonna know if it's
declining if you don't look atthe prior year or the prior Two
years, so you definitely want tolook at the w 2s to see if you
(16:37):
have a stable income trendIncreasing orbits declining.
Now our favorite tool and theone that you should probably
employ as soon as you determinethat you have.
Issues in being able to documentyour W2 wage income, like, you
(16:59):
know, the variable income is allover the place.
You can't figure it out.
You got those complicated paystubs.
So, again, the writtenverification of employment form
is going to confirm the startdate.
of the borrower.
So in case they started sometimeduring the year, not on January
(17:20):
1st, you're going to need thatstart date to then be able to
calculate the pro rated year todate earnings, right?
The rate of pay is also going tobe, documented on the written
verification of employment form.
The year to date earnings, theyear to date earnings of their,
(17:43):
what is considered.
Base pay, right?
This is where some of thosecomplicated pay stubs, issues
can be resolved with theverification of employment,
because they're going to tellyou this is the base pay and
that's where they're going toinclude.
All of those differentcategories that you didn't
really know what they were.
Well, they consider them basepay if they put them in there
(18:06):
and that's pretty cut and dry.
At that point, then you're goingto have overtime and you're
going to have bonuses andcommissions should also be
broken out on this writtenverification of employment form.
So now we have a borrower who'sbeen two years or three years at
that employer.
It's going to be nice and easybecause you just get one form.
(18:29):
They fill it out and it's goingto break out your variable, your
base income and your variableincome for the last two years
plus year to date.
And then you can do youraverages that you need to do,
which is required for all of thevariable income types.
And then very importantly, any,any promotions, any earnings
(18:49):
increases, raises, stuff likethat.
That will be documented also inthe written verification of
employment form.
Again, this is if it's completedby a human being, because if
it's completed by the worknumber, they don't add any extra
comments.
And then you're going to have toreach out, to HR for the last
bullet point there is for aletter of explanation.
(19:11):
Regarding the either the pasteof entries, what they are or
regarding the when was the thepromotion, what was the date
that their earnings, wereincreased, right?
The date of the promotion.
So that then you're going tohave, if it's a W two employee,
That is, you know, notcommission or bonuses.
(19:35):
Then you're going to use the newhigher amount off the bed.
You don't have to average theprior.
Year to date with the currentyear to date.
If they're W2, they're W2.
If this is base income, this isbase income, and you can use a
hundred percent of the higheramount of the base income.
(19:55):
Again, as long as it's notvariable income.
'cause then if it's variableincome, they could have gotten
an increase in the percentage ofcommission that they get on each
deal throughout the middle ofthe year, in the middle of the
year.
But that's not gonna change youraverages.
Right?
That's not gonna change the2022.
That's not going to change the2023, which may be what you may
(20:15):
have to use for yourcalculations.
So again, note how important itis, to take these matters into
consideration and how you shouldorder that written verification
of employment.
You don't have to wait till theunderwriter requests it.
You're analyzing the pay stubs.
Borrow submitted theapplication, you're getting it
(20:37):
ready to submit and you realize,well, no, this is all over the
place here.
Oh, wow.
This nurse.
I don't know what any of theseentries are request a written
verification of employment pindown the O.
T.
and the base pay and the timeoff and you'll be okay.
So now I'm gonna break it downfor you here in our last slide
here, because you've beenhearing me talk about year to
(20:58):
date, year to date, year todate.
You know, so I, grabbed a samplepaste of there.
This is our borrower, John Doeyear to date.
He's made 900.
So maybe there's a paste up fromlike 1950 or something like
that.
When, when, if this was, Juneand you, you know, we'll
(21:20):
calculate the income in aminute, but, the income there
that that's going to end upcalculating would have been a
lot of money back then.
But right now it could be like apart time, part time, part time,
part time, part time job.
Right.
But let's break it down.
So important components here,pay period.
The pay period is.
June 2nd.
16.
(21:40):
So, Mr.
Doe is getting paid, twice,every two weeks.
That's 14 days.
So there's going to be 26 payperiods there.
I will.
So we'll see if we need that.
And then, That's their pay rate.
Number of hours, all that kindof stuff.
(22:01):
Now, he probably has startedworking a little bit later in,
you know, not on January 1st,but we don't really know that.
So for the example here of theexercise, we're just going to
assume that John Doe startedworking on January 1st, right?
Because what we're really doinghere is the exercise on how to
(22:23):
calculate the, base income.
The income using year to date,right?
So, you know, it's, 6, 16 is thepay date, right?
So that's for, for incomeactivity, through for almost
half of the month.
Right.
So what do we do here?
Well, first we determined thegross year to date income in
(22:47):
this case.
900.
Now, if it was a morecomplicated pay stub, the
borrower may have holiday thathe got paid for vacation time
that they got paid for sick daysand other paid time off.
And once you confirm that that'swhat that is, you would add all
(23:07):
of that income to the, base pay.
To, to arrive at a total year todate.
So assuming that John Doe, his,his income, I'm here, his income
doesn't have any holidayvacation, sick days, so we're
just using 900.
But if it did have othercomponents like that, you would
add it to the base pay to get,the year to date adjusted with
(23:32):
all of the earnings that aren'tvariable income, then, you would
determine the number of monthsthat.
The borrower has worked, right?
So here we are 16 days intoJune.
So five months have passed.
and 16 days, right?
(23:53):
So we get 16 days divided by 30days, which is the number of
days in June, and that gives us0.
5333, and it repeats way outthere.
So depending where you want tocut it off, I cut it off at the
fourth decimal point there, 0.
5333, that's 16 divided by 30,and plus five months had already
(24:16):
elapsed in complete monthsbecause, you know, we're in
June, so that's Five plus, the0.53.
Three three means that we have atotal of 5.5 3, 3 3 months.
That have been worked to haveearned the year to date earnings
(24:38):
of$900.
So the next step, prettyelementary, right?
We get the$900 year to dateearnings, year to date, divide
that by five point.
Five, three, three, three.
And you arrive at Mr.
(25:00):
John Doe's monthly income of 162and 65 cents.
Right?
So again, that's, this isassuming that Mr.
John Doe has worked the completeyear in this scenario here.
It looks like, you know, if he'sbeen, if, if assuming he would
(25:23):
have worked 50 hours.
Yeah, because that says thisperiod, you know, 50 hours times
nine is 450.
Then it'd be a different story.
This would be his firstpaycheck, right?
This would be his firstpaycheck, and then you would do
the math in reverse.
But, usually that wouldn't beenough for us to calculate the
income because we need at least30 days worth of pay stubs.
(25:47):
To calculate the income.
Right.
So here, mainly this is just atraining example to show you and
illustrate that what we use toaccurately calculate the
borrower's income is the year todate figure.
So please, and this example is avery simple pay stub, but please
take into consideration ifthere's overtime, now you're
(26:09):
talking about needing to averagethe prior year or the prior two
years overtime, the same forbonuses.
The same for any commissions orany other type of variable
income.
So I hope everything, is clear.
And that, you know, you get alot of those full dock borrowers
(26:30):
and reach out to the mortgagecalculator for your W two wage
and income borrower loans.
All right.
Thank you, Jose.
Looks like we do have a questionhere.
I think we can go ahead and pullit up on the screen.
The question is, when do you usethe two year average as opposed
(26:50):
to the year to datecalculations?
Well, okay, I mentioned the oneexception where you, you're only
allowed to use the two yearaverage when the borrower works
for a business owned by theirfamily, right?
Okay.
That's a non arms linkstransaction.
And then there's going to berestrictions there of only using
(27:11):
the two year average on the W 2sand not being able to use any
year to date information.
However, in situations otherthan that, you would use the two
year average if, if yourborrower is pure variable
income, right?
Not.
Not, you know, mainly, baseincome with salary hourly and
(27:36):
then maybe some variable income,so then you would have year to
date for the base income.
That's not variable.
And then depending on the loantype.
That you're that you have, youwould use the one of the two
year.
Now, for example, FHA loans arealways going to require two
years of income on all of theirfindings, but on on conventional
(28:00):
loans, sometimes you get a oneyear income findings, but what's
going to happen is that when youwhen you tag the income and
you're up in your loan,Operating in your loan system
and your application as this isbase pay.
This is commission, and this isbonuses.
(28:21):
Automated underwriting is goingto pick up on that.
And then it's going to say, youknow, the income of this
borrower needs to be documentedby, and it may nine times out of
10 asks for a two year finding.
So I have a loan now where Ihave two borrowers.
One borrower is commissionbased.
(28:41):
I'm actually a loan officer.
The other borrower is, salary, Ibelieve, and works at a bank.
So my findings required thesalaried person to only provide
one year's W 2 and 30 days worthof pay stubs, and the commission
borrower, who's W 2, by the way,but he's commissioned, has to
(29:03):
provide two years.
Of tax returns, you know, so yougot to see what type of program
if you're going non QM, you'regoing to pick your program and
you're going to go with either aone year income option or a two
year income option, in whichcase you may be asked by
(29:23):
underwriting to provide aletter.
From an accountant, for example,that the, that income trend is
going to continue, but you wouldonly have to provide one year.
So, you know, you see how thatworks with your self employed
borrowers.
All right.
(29:45):
Looks like another questionhere.
Would you consider future wageincrease or future bonus?
No, not exactly, but yes, in away, right?
If a person has a contract, forexample, that, on a job that
they just, that they got hired,right?
(30:06):
Now you do have to look at theguidelines because they may, you
know, they have the contract andthen you can get the
verification of employment fromthe employer, then you may be
able to make it work.
But, typically, you know,bonuses or wage increases that
you may get in the future, anamount that's going to be higher
(30:30):
than an amount that's currentlybeen earned is going to be very
difficult to document.
Now, what you may be able to getin the in the remarks section of
a written VOE where the employercan write.
In some comments that it islikely, you know, like one of
the questions is, is it likelyto continue?
Right.
And then they can check yes.
And then they can write someadditional comments in box
(30:52):
number 20, where they can expandon what they meant by yes.
But that's yes of this currentamount.
That may be higher than theprior amount or maybe you don't
have the two years and that'swhat you're trying to to get
that you're going to havecontinuity of the variable
income components so that theycan even use it because variable
(31:13):
income needs two years.
But this is on agency loanguidelines.
If you read, for example, FannieMae guideline, it says we need
two years, but we may considerone year.
but less than two years.
And at that point, it's thosewritten VOEs and extra
documentation from the employerthat's going to allow you to
capture that variable income,but not necessarily bump it up
(31:35):
because next year is going to beeven higher.
Now, you're going to have towait for next year to come about
to be able to capture thathiring.
All right.
Last question here.
Do you compute variable incometogether with the base income
and average it or averageseparately?
They would be done separately.
So the base income isn't reallygoing to be averaged, right?
(31:59):
It's going to be what it is.
What's going to be averaged thenis the variable.
Let's go with confirmed, right?
We're confirming the base andwe're calculating the variable,
right?
Correct.
Yes.
So the, the variable will beaveraged and then you add the
two together and yourapplication, that's what you
(32:19):
have.
Base pay, and then commission,overtime, bonuses, and other in
the category there.
The other would be stuff likeautomobile allowance, right?
That's the way I like to phraseit too, guys.
Remember, base, we're confirmingthe base.
That's why we're doing all thecalculations, because we're
going to reduce what we think isthe base if our year to dates
(32:41):
aren't aligning with what wethink, right, Jose?
It's more of Confirming and ifit hits great, if it doesn't
quite hit, we're going to reduceit a little bit.
The, it's kind of the oppositewith variable, right?
We have to prove every dime andaverage it over time, rather
than just trying to make surethat it's on track, different,
things there.
(33:02):
All right.
I don't see any more questions.
Let's go ahead and wrap it up.
Remember we do this at 7 p.
m.
Eastern time every Tuesday,Wednesday, and Thursday evening,
where we go through a new loanofficer training topics.
We'll be back tomorrow with anew topic and we appreciate
everybody tuning in.
See you tomorrow, 7 p.
m.
Eastern.
For the next episode of the LoanOfficer Training Series with the
Mortgage Calculator.
Have a great night, everyone.
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