Understanding Base Pay, Bonus, and Overtime Income
The first point we’ll discuss is how to verify your base pay, bonus, and overtime income. When you apply for a mortgage, it’s recommended that you have at least two years of employment income. But don’t worry if you don’t meet this recommendation. Your income can still be considered acceptable if there are positive factors in your employment profile that can balance out your shorter income history.
Imagine you’re a salesperson who earns a commission. If you’ve been earning commission for less than two years, but you’ve had a steady increase in sales and you’re working in a growing industry, these factors could be seen as positive.
If you’re counting on overtime or bonus income to qualify for a mortgage, you need to have a history of receiving this type of income for at least 12 months. This is to make sure that this income is stable and not a one-time occurrence.
To verify your base pay, which could be a salary or hourly wage, you’ll need to provide some documents. These include a completed Request for Verification of Employment (Form 1005), or your recent paystub and IRS W-2 forms for the past two years. The same documents are needed to verify your bonus or overtime income.
If your hours vary from week to week, or if you regularly earn bonus or overtime, refer to the section “B3-3.1-01, General Income Information” for more details on how to calculate your income.
If you’ve recently changed positions at your job, your lender will need to determine if this change will affect your eligibility and your chances of earning bonus or overtime income in the future. Similarly, if you’ve switched from part-time to full-time employment, you’ll need to provide written confirmation from your employer.
Your lender will also need to talk to each of your employers. This is known as a verbal Verification of Employment. More details on this process can be found in the section “B3-3.1-07, Verbal Verification of Employment.”
Calculating Your Base Income
Once your lender has all the necessary income documentation, they will calculate your eligible qualifying base income. The method of calculation will depend on how often you’re paid.
For example, if you’re paid annually, your monthly income will be your annual gross pay divided by 12 months. If you’re paid monthly, your monthly income will be your monthly gross payment amount. For those paid twice a month, your monthly income will be your gross pay for each pay period multiplied by two. If you’re paid biweekly, your monthly income will be your biweekly gross pay times 26 pay periods, divided by 12 months. Weekly earners will have their weekly gross pay multiplied by 52 weeks and then divided by 12 months to get their monthly income. And if you’re paid hourly, your monthly income will be your hourly gross pay times the average number of hours you work per week, times 52 weeks, divided by 12 months.
After these calculations, your lender will compare them to your documented year-to-date earnings (and past year earnings, if applicable) to see if the income amount is consistent. Refer again to the section “B3-3.1-01, General Income Information” for more details about variable income.
Income for Military Personnel
If you’re in the military, you may receive different types of pay in addition to your base pay. These can include flight or hazard pay, rations, clothing allowance, quarters’ allowance, and proficiency pay. These are all considered stable sources of income, as long as it can be established that you’ll continue to receive them in the future. To verify your military base pay and entitlements, your lender will need your most recent Leave and Earnings Statement (LES).
Income paid to military reservists while fulfilling their reserve obligations is also acceptable. The same stability and continuity tests applied to secondary employment will be used.
References
For more details, visit Base Pay (Salary or Hourly), Bonus, and Overtime Income of the Fannie Mae Selling Guide.