One of the key steps in the home-buying process is understanding how to calculate income for a mortgage. Knowing this can help you see what you qualify for and plan your home purchase more effectively. At Edge Mortgage Inc., we are committed to helping you through every step of the mortgage process, whether you’re in Colorado, Wyoming, Nebraska, or Ohio. Let’s dive into how income is calculated when you’re applying for a mortgage.
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How to Calculate Income: Gross Income is Always Used
When lenders calculate your income for a mortgage, they always use your gross income, which is your total income before taxes and deductions. This gives a clear picture of your earning potential and helps lenders determine how much you can afford to borrow.
Full-Time and/or Salary
If you’re a full-time or salaried employee, calculating your income is pretty straightforward.
Salary Income
For those on a salary, the calculation is simple:
Take your total annual salary and divide it by 12 months. This gives you your gross monthly income. Example: If your annual salary is $60,000, your monthly income would be $5,000 ($60,000 ÷ 12).
Hourly Income
For hourly workers, the calculation is slightly different but still straightforward:
Multiply your hourly rate by the number of hours you work per week (typically 40), then multiply by 52 weeks per year, and finally divide by 12 to get your monthly income.
Example: If you earn $20 per hour, your monthly income would be $3,467 ($20 x 40 x 52 ÷ 12).
Part-Time Income
If you have part-time income, lenders typically require a two-year history to ensure consistency and reliability:
Your income over the two-year period is averaged to determine your monthly income.
Example: If you earned $25,000 one year and $30,000 the next, your average annual income is $27,500, which translates to a monthly income of $2,292 ($27,500 ÷ 12).
Overtime and Bonus Income
Overtime and bonus income can also be included in your income calculation, but like part-time income, a two-year history is usually needed:
The overtime and bonus income from the two years are averaged to get a consistent figure.
Example: If you received $5,000 in overtime one year and $7,000 the next, your average annual overtime income is $6,000, which is $500 per month ($6,000 ÷ 12).
Self-Employed Income
For self-employed individuals, the process is a bit more involved. Lenders typically require a two-year history, and they use a worksheet to calculate your income:
Net income from your tax returns is used, but certain deductions like depletion, depreciation, business use of home, and mileage are added back in. The average of the two years is then taken. If you have been self-employed for more than five years, lenders may only require one year of tax returns.
Example: If your net income was $50,000 one year and $55,000 the next, and you had $5,000 in deductible expenses added back, your average annual income would be $57,500, which is $4,792 per month ($57,500 ÷ 12).
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Understanding how to calculate income for a mortgage is crucial for knowing what you can afford and planning your home purchase. At Edge Mortgage Inc., we are here to guide you through this process and ensure you have all the information you need to make informed decisions. We serve all of Colorado, Wyoming, Nebraska, and Ohio, and our team is ready to help you achieve your homeownership dreams.
If you have any questions or need personalized advice on calculating your income for a mortgage, don’t hesitate to reach out. Contact us today, and let’s get started on your journey to homeownership!
Read Some 5-Star Reviews From Our Happy Clients
“We have used Edge Mortgage, Inc. 3 times. Every time has been fantastic. Keri is honest, and dependable and will do anything she can, with her team, to get you the best rates. We have been treated like family every time and will use her services again in the future. Highly Recommend.” -Stephanos
“Working with Edge Mortgage was such a great experience! Keri is incredibly helpful and was always thorough in answering our questions and concerns. She responds in a timely manner and really goes the extra mile to make sure everything is done correctly, which I greatly appreciated. Definitely recommended!” -Nashira
Edge Mortgage Inc. is your trusted mortgage broker serving Colorado, Nebraska, Ohio, and Wyoming
Edge Mortgage Inc. is located in Johnstown, Colorado, and serves all of Ohio, Colorado, Wyoming, and Nebraska. We offer honest answers and a stress-free process and we have no hidden or extra fees, keeping more money in your pocket. We are your trusted mortgage broker and we are ready to serve you. Call us today at 970-744-0000.
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