-If you are a W2 employee, Fannie Mae criteria dictates that the total of all monthly payments does not exceed 45% of your gross monthly income. This total includes the future housing payment (Principal, Interest, Taxes, and Insurance), car payments, student loans, other installment loan payments, credit card payments, etc. However, utility bills and car insurance are not included in this calculation.
-Mortgage bank underwriters want to make sure that a borrower’s income is stable and is likely to continue. For a W2 employee that means that she is in her current profession for at least 2 years. This does not mean working for the same company but in the same line of work. If, for example you worked as a bartender and just recently changed jobs and started working as an office manager, you will have to wait for 2 years for a bank to count your income as stable. The only exception to that rule is if you have completed an educational program (college, or an accreditation program) and were awarded an official certificate or a diploma in a new field. In this case the two-year requirement is waived.
-It gets more complicated when a borrower is self-employed. When your wages are anything other then a W2 you are considered self-employed by mortgage underwriters. Even if you work for the same company for the past 10 years as a computer consultant, as long as you are paid on 1099 you are considered self-employed. In this case your income is based on the average of your two most recent years’ net income (or net profit). An example would be if you are applying for a mortgage in 2013 and your 2012 gross income was $100,000; after all expenses your net income for that year was $80,000. In 2011 your gross income was $70,000 and net was $40,000. A mortgage bank underwriter will use the average of $40K and $80K, or $60K per year.
-Another common “hick-up” that catches a lot of applicants by surprise is what would happen when one switches their employment from W2 to 1099 even while remaining at the same company – something that is very common with IT professionals. Since, in the eyes of a bank underwriter this change constitutes becoming self-employed, this borrower will have to work for two years in order for the 1099 income to be considered by the bank.
While I know a lot of these rules and regulations are seemingly arbitrary, for now they are still the rules! So don’t shoot the messenger, since I am not criticizing or defending them. I just want to inform you of these guidelines so that all are more prepared for dealing with banks when the time comes.