How lenders see your income. W2 / K1/ 1099

Your income is a big piece of the puzzle when it comes to qualifying for a mortgage. The lender is required to calculate a monthly gross income figure using supporting documentation such as paystubs and tax returns. The calculated monthly income is then compared with your current monthly debts/obligations to determine your debt-to-income-ratio. There are several different ways a borrower can earn a living and below are the 3 most commons forms of income.
W2 or salaried earnings is the most common. The qualifying calculations are by far the easiest and in most cases, lenders can use the base salary listed on your employment contract and divide it over 12 months to come up with your gross monthly income. With this type of income it’s not uncommon for lenders to even allow you to close on your new home before starting your future employment, provided you are scheduled to start within a month or two. This can be very helpful if you are moving a long distance and want to get settled before you start working.
1099 or contracted income can be a little more involved. Typically you need a two year history of receipt of this income for it to be considered in qualifying calculations. If you have no history of contract work and have a 1099 employment contract, then lenders may need to pursue an underwriting exception for approval. This is because 1099 employees are usually responsible for their own taxes, insurance and expenses and the majority of banks will need to use an average of these expenses to determine a borrower’s income. These expenses or deductions are typically outlined on a personal tax return and help lenders establish a confidence that the income will continue at a stable or increasing rate. There is a lot of gray area with this income source and it is important to discuss with your lender in order to uncover potential issues up front.
K1 or self-employed income is typically issued to a partner or owner of a company. Much like the 1099 income, K1 income is equally if not more involved. Again, there is gray area here as well, but if you own 25% or more of a company you will likely fall in the self-employed bucket, which brings rules of its own. Commonly, lenders require a two year history of self-employed income and are required to analyze both business and personal returns in order to average the income and determine if it’s likely to continue at the qualifying rate. If you are self-employed, then you should plan on providing more paperwork to your lender to include personal and business tax returns, profit-and-loss statements, and balance sheets.
Hopefully this helps shed a little light on a few different forms of income. As I mentioned, please be sure to talk to your lender up front about the type of income you have as it may greatly impact your loan product or the type of documentation you need to submit. If you are choosing between a couple different job opportunities or know your income is going to change, then you might want to factor in what these changes will mean if you are considering purchasing a home.

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