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!


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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 thousands of Non-QM mortgage loan program variations using alternative income documentation!

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Episode Transcript

Restream recording Nov 26, 2 (00:00):
So what do we mean by non variable
income?
Right?
I was just talking about that.
That is income with apredetermined amount that occurs
with a regular frequency and hasa defined Documentable,
documentable term, right?
So this is your, your salariedbuyer, borrower, excuse me, your

(00:23):
hourly borrower, those that youknow, they work either, you
know, 40 hours every week, 52weeks a year, they're going to
get paid either bi weekly, whichmeans every two weeks.
Or they're going to get paideither bimonthly, which is twice
a month, or maybe they get paidmonthly, or maybe they get paid

(00:44):
weekly.
For this type of borrower, um,the way to document their income
is going to be with pay stubsdated within the last 30 days.
of the initial application.
W 2s are also usually going tobe needed for the prior two

(01:04):
years or whatever automatedunderwriting states.
If you're a DU finding state,you only need one year W 2s and
that's all you're going tosubmit with the loan.
A written verification ofemployment.
Uh, so you, it, it, it could bethe, you know, pay stubs, W 2s,
or you could provide the writtenverification of employment, uh,

(01:26):
either from the employee, theemployer, excuse me, or from a
third party vendor like the worknumber.
And, uh, the verification isgoing to include the year to
date income for the currentyear, plus the prior year's
earnings, 2023.
And 2022, depending what you arerequired to provide according to

(01:46):
your automated underwritingfindings.
And then, of course, prior toclosing, at least 10 days.
Um, prior to the note date, uh,you're going to need a verbal
verification of employment aswell.
Now, in certain cases, we couldhave W 2 borrowers where, um, DU

(02:11):
may not state that you need taxreturns, but the specifics of
the case do state, or DU maystate it depending on how it was
documented on the application.
But scenarios where tax returnswill Be required are going to be
when the employee is employed byfamily, right?

(02:32):
If they're employed by family,the guidelines are a little bit
different on the, um, forexample, on the agency loans,
right?
It's going to tell you in thatcase to use the prior 2 years
income.
And not to use the year to dateincome, a little bit of a
confusing twist there.
But the reason that they saythat is because they fear

(02:53):
collusion between the borrowerand their family member, right?
Like they know they're going toget a house now they need to
bump their income.
So they're going to ask to havetheir current income.
Bumped up, which may or may notbe a realistic income amount,
uh, may not be the actual one.
So in those cases, if you areemployed by a family member,

(03:16):
they're going to look at the taxreturns.
They're not going to look at theyear to date income.
Year to date income may, will belooked 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 whenthe borrower is employed by an
interested party to thetransaction.

(03:37):
So, for example, if the borroweris employed by the seller, then
that, that does happen.
You know, um, somebody works fora company, the owner of the
company's selling the house,selling a property they own.
They say, Hey, I want to buyyour property.
Sure.
Give me a chance.
They buy it, put an offer on it.
Well, that person is aninterested party to the

(03:59):
transaction.
The seller who also happens tobe the employer of the borrower.
So you're going to need taxreturns for that same scenario
with the pay stubs.
Now, um, borrow the selfemployed.
That's not, you know, variableincome.
That's not non variable income,but just letting you know, that

(04:19):
is a scenario where you'realways going to require tax
returns, interest.
And dividend income alsorequires tax returns.
Foreign income, in other words,income earned outside of the U.
S.
that the borrower is declaringin their U.
S.
tax return, also requires taxreturns.

(04:43):
And of course, rental income,right?
Rental income is documented onthe Schedule E, as in Edward.
Page one.
of the Schedule E because pagetwo of the Schedule E is where
the royalties for corporateincome go.
Now, regarding the actualcalculation of the income, this

(05:08):
is super important because Ifind in too many cases that I'm
reviewing files and loanofficers are using just the W 2
income.
For example, I'll ask them, howdo you calculate the income?
Oh, I grabbed The last twoyears, W 2s averaged it out,
divided by 12, and that's myincome.

(05:29):
I mean, that's okay if you werelooking, for example, a borrower
employed by family, and that'swhat the guidelines tell you to
do.
But that's not how you wouldnormally calculate the income,
non variable income, for asalaried or hourly employee.
You would use the year to dateincome.

(05:50):
That is the accurate depiction.
Of what the borrower is earningright now at this point in time,
right?
So if they are not employed byfamily or by an interest or by
an interest reported to thetransaction, and they are
salaried or hourly employee,then.

(06:11):
You would not use the W twos,you would use the year to date
income.
Now you still do look at the Wtwos for the continuity of the
income, meaning, for example, ifthey made$60,000 in 20 22 6 and
um,$61,000, let's say in 2023.

(06:34):
But now in 2024, you're almostat the end of the year, and it
doesn't look like they're goingto 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 declinein income.
So that's why W 2s are looked atto as a, um, benchmark.

(06:57):
And then you look at the year todate and if it's the same or
more, you're good.
If it's less and you havedeclining income, depending on
the percentage of the income isgoing to be the severity of the
impact to the deal.
Right.
So, um, how do you calculate theincome?
Well, the first thing you woulddo, and this is now one of the

(07:17):
assumptions here, of course,when you're looking at this is
that the borrower startedworking at the current employer
on January 1st hasn't missed anytime.
Right?
So.
You, um, you know, you're goingto base it on accurate amounts
there.
If the borrower started workingafter January 1st, then
definitely a writtenverification of employment is

(07:39):
going to be required to confirmwhen was the actual start date,
you're going to see how manymonths have elapsed from the
start date to the current payperiod.
And that's how you're going tocalculate the year to date
income, right?
You're going to establish howmany days.

(08:00):
in the year have passed, right?
That's, that's how you wouldcalculate that.
So in this example here, we'regoing to assume that the
borrower started working onJanuary 1st.
So first thing we have todetermine the gross year to date
income.
So in our scenario here we haveJohn Doe that his year to date,

(08:20):
uh, earnings are 900.
And, um, we're going, so nowonce you get the year to date
gross income, you also got tonote the following.
And in some cases these paystubs can be a little
complicated with sick days, paidtime off.

(08:41):
Vacation and other components ofthe income.
So remember, overtime is adifferent category, but paid
time off, sick days, holidays,and vacation are usually days
that they got paid for when theydid not work.
And that usually means that the,um, earnings for the hours

(09:04):
worked or the salary is going tobe 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 dateearnings from their regular pay
plus vacation, sick days andother paid time off to get a

(09:27):
total amount and then you'regoing to get that total amount
and you're going to divide it bythe number of days, um, days.
By the time that has elapsed.
So, for example, in thecalculation that I did there, I
calculated that we were in June16 pay period, which is what it
says there on the pay, uh, paystub pay period is 62 of 06 to

(09:52):
616 of 06.
So that means that, um, that isall the earnings that John Doe
has earned.
Through June 16th, the calendaryear.
So now, uh, we get 16 days that,um, have elapsed in the month

(10:13):
because the pay period wasthrough June 16.
That's how much money he madethrough June 16.
So we get the 16 days and wedivided by.
30 days because there's 30 daysin June and that gives us a 5333
and it's actually 533 repeatinginto infinity.
So, you know, I just cut it offat the fourth decimal point

(10:36):
there.
And then you get a June.
So June 16th in numerical termsis represented by the number 5.
5333 because there's five monthshave elapsed.
Through May, all of May, youknow, January, February, March,
April, May are complete.
And then we got partial haselapsed of June.

(11:00):
So 5.
5333 is the numericalrepresentation of June 16th.
So then you get the year to dateincome since our borrower has
been working since the beginningof the year.
So our year to date income is900.
And we divide that by 5.

(11:22):
5333 and we arrive at ourmonthly income of 162.
and 65 cents.
So, that would be our, our, ourcalculation for the actual year
to date income through 6 16, youknow, uh, in this case, let's

(11:44):
say 2024, right?
Uh, you would not, okay, Irepeat, you would not get the
number of hours times the payrate, right, You will not
multiply that and then assumingthat he gets paid.
Uh, in this case, he gets paidevery two weeks, right?
So you would not get that figuremultiply it times 26 and divide

(12:09):
by 12.
That's not what you do.
Now you could do that.
If you want to establish sometype of a benchmark, like what
would he have earned?
If he worked 40 hours everyweek, because borrowers simply
sometimes do not work 40 hoursevery week in the whole year.
There may be a pay period wherethey work a few less hours.
Maybe that's because ofvacation, paid time off,

(12:31):
holidays, whatever it may be.
And that's where those othercategories may come into play.
So if you want to do thatcalculation just to confirm what
it would be in the idealscenario to see if you're over
or under in your year to datecalculation, but only use that
just to compare because that isnot the income because you

(12:52):
cannot assume that the borrowerworked 40 hours every week of
the current calendar year.
Right.
If you do, you're, you're goingto be off.
Especially if it's a borrowerthat you see that has a lot of
vacation and pay time off andother components there to the
pay.
He probably has been in trainingon some other days as well that
he didn't get paid for on thehourly, got paid for through the

(13:15):
training, uh, cost code.
Let's just put it that way.
So really important year to dateincome is the key and we only
use the W 2s.
To, uh, confirm the continuityof the income to see if it's the
same or if it has decreased.

(13:36):
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'sany questions.

(13:59):
No questions from anyone.
Alright, so I do look forward toseeing you in, uh, tomorrow's
training.
Thank you and have a great day.