Training Day 4: Mastering Income Types and Debt Calculation in Mortgage Lending
Introduction
Welcome to Training Day 4 of the Boots 2 Loans program. In today’s session, we will dive into different income types, how to calculate income for various scenarios, and the role of debt in mortgage lending. Understanding these factors is essential for assisting clients in securing mortgage loans tailored to their unique financial situations.
Learning Income Types
As a mortgage loan officer, you will encounter clients with various income sources. It’s essential to understand and differentiate between income types to accurately assess a borrower’s ability to repay a mortgage loan. The primary income types include:
- W2: This income type represents wages paid by an employer to an employee, as reported on a W-2 form.
- Military: Military income can include basic pay, housing and food allowances, and additional allowances for hazard duty, deployments, or other special circumstances.
- Self-Employed: This income is derived from operating a business, freelancing, or working as an independent contractor.
- Disability: Disability income can be from Social Security or private insurance benefits due to a disability that prevents a borrower from working.
- Child Support/Alimony: Regular payments made by one individual to another for child support or spousal support after a divorce.
- Future Income: Income that a borrower expects to receive in the near future, such as a new job or a promotion.
Calculating Income
Different income types require specific methods of calculation. Accurate income calculation is essential in determining a borrower’s debt-to-income (DTI) ratio, a crucial factor in mortgage lending decisions.
- W2 Income:
Standard: Calculate annual salary or hourly wage, plus any additional income such as overtime, commissions, or bonuses.
Specialty Jobs: For professions like nurses, teachers, and union workers, calculate income considering factors such as shift differentials, contract terms, or seasonal pay adjustments.
- 1099 Income: Calculate income based on the total amount earned as reported on 1099 forms, typically for freelance or independent contractor work.
- Self-Employed Income:
- Schedule C: Calculate income using the net profit or loss from a sole proprietorship or single-member LLC.
- Schedule E: Calculate income from rental properties, partnerships, or S corporations.
- 1120 Tax Returns: Calculate income based on corporate tax returns, factoring in salary, dividends, or retained earnings.
Debt
Debt is a crucial factor in mortgage lending, as it impacts a borrower’s ability to repay a loan. Lenders consider a borrower’s outstanding debt obligations, including credit cards, car loans, student loans, and other debts, when determining a borrower’s DTI ratio. A lower DTI ratio generally makes it easier for a borrower to secure a mortgage loan with favorable terms.
Conclusion
Mastering the intricacies of various income types and understanding how to calculate income accurately is essential for mortgage loan officers. Additionally, considering a borrower’s debt when assessing their financial situation allows for a more comprehensive understanding of their mortgage eligibility. As you progress in your career as a Relationship Lender, these skills will prove invaluable in helping your clients achieve their homeownership dreams.
