Brooke Marion has more than 15 years of experience in the mortgage industry and she joined Mr. Cooper in 2011 as a loan originator — but her passion for connecting with people led to her role as our social media community manager. With her knowledge of so many aspects of the business, Brooke can help break down the mortgage process — and you might even find her answering your questions on Twitter and Facebook! Get in touch with Brooke at [email protected].
I was in 3rd grade when I learned there are certain “off-limits” questions you just don’t ask people – a few of them being how old they are, who they voted for, and how much money they make. One day I saw my teacher opening a mysterious letter (which she said was just her paycheck). My natural question was, “How much is it?”
Now I have a career where asking everyone (in our first conversation) how much they make is part of the job. It’s part of the loan application process, so luckily most people are expecting it. For many people though, it’s still a touchy subject. But here’s the good news: Being prepared is half the battle.
Lenders always need to list two years of job history. If you have moved jobs within the last two years but stayed within the same industry and same compensation structure, that’s okay, but always be sure to disclose any and all job changes (even if you had temporary jobs in between). Also, gaps in employment are not deal-breakers — if you have gaps longer than a month or two, you’ll probably have to write a brief letter of explanation for your file, but it’s usually more important that you are currently employed. The only time that employment status might get dicey is when income is heavily overtime, bonus, or commission-based. In order to consider this as qualifying income, borrowers generally have to be with a current employer for more than two years.
Overtime, Bonus & Commission Income
Consistency is key. Underwriters look for “stability” and “likelihood to continue,” so for any portions of income that are variable, underwriters will take a 2-year average. This means that the number on last year’s W-2 may not be the final number, and this is why it is SO important to tell your loan officer the exact breakdown and structure of your income. Here’s how it usually works for full-time employees:
- Base Income: Your regular salary, or if you are paid hourly, your hourly rate x 40 hours per week x 52 weeks per year.
- Overtime and Bonus Income: The lender will want 2 years worth of W-2s, and they will send a form called a “written verification of employment” to your employer to break down your income (all sources) from the last 2 years.
- Commissions Income: This is commonly mistaken as being the same as bonus income, but it’s very different. For commission earners, the key question is whether this portion of income is 25% or more of total income. If the answer is yes, then you will have to provide full tax returns for the most recent 2 years, in addition to W-2s. This can be stressful for applicants when they are nearing a closing date only to find that the lender suddenly needs tax returns (not just W-2s). Knowledge is power, and if you know you’ll fall into this category, try to be prepared with the documents you need.
Pro Tip: Find your final paystub for last year and the year before. This will break down your “year to date” earnings, providing exact numbers for your loan officer and potentially speeding up the loan application process. This can also ensure that your loan is set up correctly from the beginning, lowering the likelihood of a “debt-to-income” ratio issue.
If you are self-employed or have a side business that generates additional income, you will need tax returns from the last two years. Lenders will ask you for your taxable income, which means they need to know the amount you report AFTER deductions. The simple question to ask: What is the amount that your income taxes are based upon? To find this, you need to know whether you file as a sole proprietor (using schedule C) or as an S-Corporation, LLC, or Partnership (using Schedule E). Once you determine this, your lender should be able to tell you what documents you’ll need to provide.
Pro Tip: If you file a separate business tax return, be prepared to send both your personal and business tax returns, including K-1 statements if you have them.
Here’s some good news: Mr. Cooper now offers a “Bank Statement” loan product for qualified self-employed borrowers. If you’ve run into a roadblock because of the tax return requirements in the past, you may be able to qualify based upon your bank statements. Talk to a Mr. Cooper mortgage professional to see if you meet the requirements for this new program.
Retirement & Social Security Income:
Retirement and social security are actually some of the easiest sources of income to document, and the key is to break down the amounts if you have more than one type of income (i.e. pension and social security). Be prepared with your most recent two years of 1099 statements, which are the year-end tax statements mailed to you, as well as a copy of your bank statements if you receive your income via direct deposit. Social Security recipients will require a Social Security Benefit Letter for the current year, and they are usually mailed out in December.
With this information in your back pocket, you’ll hopefully find yourself better prepared for this first step in the loan application journey. If you have any questions, please give one of our mortgage professionals a call and we will do our best to guide you through the rest!