How Banks Figure Out Your Income
This article will help you better understand how banks, mortgage companies, credit card companies, and other lenders determine your income. The loan amount you’re offered or the line of credit given will have much to do with how your income is determined. Banks, mortgage companies, credit card companies and other lenders determine and calculate income differently then what most people would. In understanding how they determine your income, there are two important questions that always need to be answered.
1) How much did you earn and for how long.
2) What is the likelihood of it continuing and what can be expected in the future.
The second question, naturally, is more important than the first.
First basic rule: Gross income versus net income.
People generally consider the net amount of their paychecks, after taxes and other deductions are taken out, as the money they have available to spend. Banks consider your gross income before any deductions and taxes are removed.
How long do I need to work for a company?
In general, two years or better is a good rule. Any less time will need to have a good justification for consideration.
For example: If you have recently changed employers, the lender will take into account the time spent with your previous employer if your new job is in the same line of work as your previous job. The exception to the same profession rule is if you have just completed a course of study and you are now employed in the area of your study.
When do banks consider side income like overtime, bonus, and commission?
Banks, in general, will only consider your base salary and not any overtime, bonus, commission, or any other “side” income that is earned. The only time a bank will consider the side income is if it happens on a regular and consistent basis. For Example: You make about $100 to $200 per week commission. You have been making this commission income regularly for the last year or longer and your employer can verify this fact. Then the bank will average out your side income over the last 1 to 3 years and credit that average amount towards your salary. The opposite would be if your commission checks were sporadic. Then the bank would not consider or, at best, give you a small credit towards your total income. The key is the extra income must have a history of being earned and a good likelihood of future earnings.
What about Part Time Jobs?
Part-time jobs will only be considered if you have at least a two year history. There can be exceptions to the basic rule. The best exception is a good reason why you will be continuing to work this job into the future. A good example: You have finished a certification course of study to become an Emergency Medical Technician. Your main job is working at a bank as a bank teller. Six months ago you started working for the fire department part time until a full time position opens. The exception used is that you have invested time, effort, and money to work in this field and that the part time job is not just temporary. The key is that this part time job is part of your career and not just temporary, extra income.
Can we include income from others living with you?
The main question the bank will ask is there a history of living together and the likelihood that it will continue. Good examples: You’re taking care of someone like elderly parents or a person that is disabled. A domestic partner that you have lived with for a long time. Someone you have just married. Bad examples are kids and renters (they move on). In most cases, the bank will want them listed on your loan application and undergo the same loan requirements. By having them on the applications, it shows their intended commitment to the payment. The bank wants consistency in past living arrangements that will continue into the future.
What about retirement income, disability income, pension income, a structured settlement with regular payments?
The same rules apply. The key here is more about the future then the past. The lender is more interested in how long it will continue. Retirement and pension income generally last until death while disability may be either long term or short term. They key to prove is that this income will last for years to come.
In all cases, you need to look at the past and the future. Lenders like things that they can calculate and put into a simple formula without giving too much thought. The more supporting documents you can provide and writing good letters of explanations will help persuade the bank on getting all your income included.
Lastly, any exception that banks grant you from their predetermined formula will always translate into higher fees or interest or, in general, both. That is why before you apply to a bank, or any Lender, ask them how they would view your particular situation.
Hope this helps and Take Care