How Underwriters View Increasing Income in DTI Calculations

This guide covers how mortgage underwriters view increasing income in debt-to-income calculations. Income is probably the most important factor in qualifying for a mortgage. Income is the biggest determinant on debt-to-income calculations. Borrowers need sufficient income when applying for a mortgage because income determines the borrower’s ability to repay the housing payment and other monthly debts. As mentioned in many of our previous articles on GCA FORUMS, you can have the highest credit scores possible but if you do not show enough documented income, you cannot qualify for a mortgage loan. On the flip side, you can have credit scores as low as 580 FICO, prior bad credit, open collections, prior bankruptcy, prior foreclosure, prior deed in lieu of foreclosure, prior short sale, but if you have sufficient documented income, you can qualify for a mortgage loan. This only holds true as long as you have had timely payment history in the past 12 months and re-established credit. In this blog, we will discuss how mortgage underwriters view icreasing income in debt-to-income ratio calculations.

How Underwriters View Increasing Income in the Past Two Years in DTI Calculations

All lenders will require a two-year employment history. The employment history does not have to be being employed at the same job. You can have gaps in employment. But as long as you have an overall two-year employment history you will qualify for a mortgage. Those first time homebuyers or buyers who have been a full-time student and do not have a two-year employment history can still qualify for a mortgage loan because lenders view full-time schooling the same as full-time employment. This holds true as long as they can prove that they have been a full-time student and provide college or technical school transcripts. Post high school schooling can be substituted in lieu of employment history.  Part-time employment history is part of the two-year employment history.  Click here to get an help about your mortgage

How Do Mortgage Underwriters Calculate Income and Increasing Income

Here is how mortgage underwriters calculate income in general.  Again, different mortgage companies may have overlays in how underwriters view income, especially increasing income. Self-employed income is calculated differently than income from a full-time hourly or salary wage earner. If you are a self-employed borrower or a 1099 wage earner, two years of  federal income tax returns and two years of 1099 is required. You can only use and average self-employed or 1099 income for the past two year only if the borrower has increasing income and not decreasing income. Danny Vesokie, the President and Chief Executive Officer of Affiliated Financial Partners, Inc., a commercial loan officer training school, shares his thoughts about increasing income:

If your two years adjusted gross income is similar the two years, then the mortgage underwriter will average the two years income to derive to your monthly gross income to calculate your debt-to-income ratios.

If your income is less than the most current year then your prior year, then the most current year gross adjusted income will be used to calculated your monthly adjusted gross income to calculate your debt-to-income ratios. If your most current income is substantially less then your prior year’s adjusted gross income, then your income may not be used unless you can prove that increasing income is forecasted in your adjusted gross income for the next three years and the reason of the substantial decline in income was a one-time incident. Letter of explanation and documentation and/or proof will be required.

Gap in Employment in The Past 2 Years

If you had gaps in employment of under 6 months and got a new job, your new job wages will be used. The previous income will not come into play. This holds true as long as your employer can verify it through verification of employment stating that you are full-time status and your income and job will likely to continue for the next three years.

How Underwriters View Over Time, Part-Time, Bonus Income

Over time, part-time, and bonus income can be used towards debt-to-income ratio qualification. This holds true as long as you have had a two-year continuous history and the likelihood is likely to continue for the next three years. Going from part-time wage earner to full-time wage earner and showing increasing income. There are many workers who get hired on a part-time status or probationary status and get offered full-time status with a jump in wages.  This type of case happens quite often. In cases like these, mortgage underwriters will use the new full-time status and wages. This holds true as long a the verification of employment verifies this fact. Click here to apply for a mortgage loan

FAQs on How Underwriters View Increasing Income in Debt-to-Income Calculations

Here are some frequently asked questions (FAQs) regarding how mortgage underwriters see increasing income as it relates to debt-to-income DTI:

How Does Increasing Income Affect DTI Ratio

Answer: It is generally seen that while an increasing income lowers your DTI ratio, it shall be able to lower DTI (debt-to-income ratio) by the effect and more comprehensive details found in (monthly debts ÷ gross monthly income). The more income one has, the more DTI. This is even though the generally acceptable DTI ratio has thought and elevated the prospects of mortgage approval.

What Types of Income Can Be included to Increase DTI ratio

Answer: Additionally, mortgage underwriters take into account some other types of relevant income that can be included in the DTI, such as:

• Base salary or hourly wages.
• Overtime pay (if consistent and documented).
• Bonuses: As a rule, only those should be consistent for two years or more.
• Income from self-employment (generally calculated on average over two years).
• Part-time income (if it’s frequent and documented).
• Divorce alimony and child support (if reliable and documented for at least three years).
• Social Security, pension, or any disability income (if stable and almost sure to continue)

How do Underwriters View Seasonal or Fluctuating Income?

Answer: Seasonal and fluctuating income, such as overtime and commission structures, can be included during DTI calculations as long as they have been consistent and documented in the last two years. Usually, exposures paid in a lump sum, such as bonuses, are adjusted downwards by the lenders using the two-year trend.

Can I Include a Recent Raise or Promotion in My DTI Calculation?

Answer: Yes. Future income is not a factor when evaluating a mortgage application. However, in most instances, the underwriters will have no choice but to consider net income amounts above a rise-constrained level due to the promotion supported by proper documentation and evidence such as an overheated employer letter or pay stubs.

How Long Will it Take Increasing Income to be Considered in the Mortgage Application?

Answer: Usually, underwriters require a two-year history of the income being stable or on the rise. However, proper documents can justify adding a more recent increase or promotion where the income is higher than what’s currently reflected on the tax returns.

Is Non-Taxed Income Useful in Reducing My DTI Ratio?

Answer: Yes, non-taxed income, such as Social Security or some disability income, can be inflated by underwriters to 15% to 25% because it is not liable to taxation. This will help increase your qualifying income and thereby reduce your DTI ratio.

In This Case, What if My Salary has Increased, But My Salary Changes Constantly From One Month to Another?

Answer: Regarding income fluctuation, such as commissions or self-employment, the underwriters may accrue your income for two years to avoid variations related to the period. Suppose the trend is all up – which is still possible because of the stability of the income.

Should Underwriters Include DTI Considering Future Employment Income, Especially if I Am Commencing a New Job?

Answer: Some lenders will allow a new job offer letter or promotion to include future income. This is even when it is apparent that the distraction of new employment may be in different fields. Even so, they may want you to commence the job before the execution of the loan or provide evidence of the first check.

In a Household Where Both Spouses Have Increasing Income, What Happens to the Joint Income When the Underwriters Process the Case?

Answer: If you and your spouse’s incomes grow, underwriters will regard each source separately for income. Therefore, non-occupational income will be useful in the DTI even when the two incomes have been consolidated, and bills have been documented and stable.

What happens in Cases Where There Has Been a Downward Drift in My Late Earnings? How is This Going to Change My DTI?

Answer: A decrease in income trends would send signals of concern. This is especially due to the instability it depicts. When doing the DTI, they may consider your earnings within the last two years instead of your most recent lower earnings. It is a must that excusable facts are provided for any income drop.

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Insights on How Underwriters Qualify Income Considering DTI Calculations

What effect does increasing income have on my debt-to-income (DTI) ratio?

Details: If your income rises, this will reduce your DTI share. The DTI share is calculated as the total monthly debt obligations against gross monthly income. For instance, assume you have monthly debt obligations worth $2,000 and a gross income of $ 5,000. If your gross monthly income rises to $ 6,000, the (DTI) will reduce from 40% to 33%. Therefore, it becomes easier to lend to you as it shows that you can easily handle your debts since the DTI is not high.

Case Scenario: For example, Sarah had a gross monthly income of $4,500 and had to make monthly debt repayments of $1,800. Thus, her DTI was 40%. She was later promoted, and her income rose to $5,500, lowering her DTI to 33%. Such improvement helped Sarah secure a good rate on her mortgage.

What are the sources of income that I can add to improve the current DTI ratio?

• Details: Different kinds of income sources fast-track your DTI ratio. However, income sources must be reliable for them to be considered. Some of the common acceptable income sources include:
• Self-employment income: Generally calculated as an average for two years based on the returns filed.
• Miscellaneous income: It is accepted as long there are regular and dependable income streams.
• Alimony/ child support: Must establish a consistent history and be supported with documentation that it will last at least three years.
• Social Security or pension: Look for steadiness and goodness; most likely, these will last more than three years.
• Case Scenario: John has a steady part-time freelancing income of $20,000 and a full-time salary as a teacher of $45,000. Since both incomes are steady and reliable, the underwriter does not discard any of them while computing DTI so that he can access bigger loan amounts.

How Do Underwriters View Seasonal or Fluctuating Income?

Details: Seasonal or fluctuating income (commissions, tips, or overtime for shoutouts, for instance) is acceptable, provided there have been records of earning these funds for at least two years. Underwriters will always calculate the stability of those seasonal earnings and incorporate them into the DTI ratios.

Case Scenario: Maria works in retailing, where her earnings are not constant and depend on the seasons. She also earns holiday bonuses. Over the last two years, she has earned a steady income in her retail job. So, the lender decided to take an average of her seasonal earnings and apply that towards his DTI limitation.

Am I Allowed to Factor in a Recent Promotion in the DTI Calculation?

Details: Underwriters will include your higher income if you receive a raise or promotion. But they require documentation, such as a recent pay stub, an employment contract, or a letter from your employer verifying the raise.

Case Scenario: After two years of working at her company, Lisa was promoted with a salary increase from $60,000 to $75,000. For her DTI to be calculated with the increased compensation, she had to submit an employment letter confirming her new title and pay, which she did.

How Long Should I Maintain an Increasing Income Level for the Same to be Considered in My Mortgage Application?

Details: Underwriters usually want two years of consistent income history. New income increases, such as raises or jobs, can also be included in some cases, provided the proper documentation supports the amounts. Underwriters may ask for additional details about the stability and expected duration of the income.

Case Scenario: Tom changed his job last month but stayed in the construction company. His new salary was 10,000 dollars more than his previous position. His new employer’s job offer letter had not been in place for a year. Even though he had not yet completed a full year on the job, the underwriter accepted the increase in income based solely on the offer letter and someone’s previous work in the same field.

Is My DTI Ratio Going to be Improved by Non-Taxable Income?

Details: Also, certain types of non-dischargeable income are not considered taxable by lenders (e.g., Social Security benefits or some disability benefits) and can be increased from 15% to 25%, as there is no tax on this income category. In this way, less of this income is included in the calculation of the DTI ratio, improving the probability of being approved for a loan.

Case Scenario: Julia does not work and gets $2000 monthly non-taxable Social Security benefits. The underwriter “grossed up” her income, which is $2,500. This is not earned per se but qualifying income, which helped secure a higher loan.

What is the outcome if one earns an increasing income yearly, but the amounts earned change monthly?

Details: If this is the case, and a person’s income is ‘swinging’ up and down, the underwriters will typically look back on the last couple of years and take the average income over that time frame. This is usually a positive thing. All other things being equal, a vast majority would prefer to earn more, but because it is a general trend, the average will unlikely be used to avoid loss.

Case Scenario: Of the two, Chris is a contractor who earns different amounts in different seasons. Throughout those two years, his income rose. Still, as was noted at the beginning here, the underwriter decided to take the average figures to balance things out, which again turned out to be within the acceptable DTI ratio.

Upon job changes, will underwriters still count some future expected incomes?

Details: Underwriters are willing to count future income but only if there is already a signed offer letter and the job is the expected one or one that will value the person’s career. If that is the case, they may still want you to hold off on closing till you start the new position and provide a paystub toward the closing date.

Case Scenario: Mark is changing jobs, and this time, he is moving to a higher salary in the same profession. His offer letter contains a salary increase of $15,000. The lender will incorporate this into DTI computation only when the borrower presents the first paycheck before full disbursement.

When both spouses have increasing income, how do underwriters perceive joint income for credit purposes?

Details: When both spouses have increasing incomes, underwriters treat each income source separately and add it to the total DTI ratio to include the combined household income. Each spouse’s income shall be recorded and verified to be the same.

Scenario: Jane and David have recently progressed in their jobs and earned raises. Where Jane’s previous salary of $50,000 should now be $60,000, David’s former salary rose from $70,000 to $80,000. Their $40.000 income, which is earned by combined income, was used in the DTI ratios, thus enabling them to get more loans.

What if my income has been going down of late?

Details: If your income has been declining, underwriters may consider this a risk even if you earn sufficient income to meet adequate DTI at present and for the foreseeable future. Depending on the pronounced decline, they may also average your income for the past two years or take the deepest drop for the most recently incurred income.

Scenario Situation: Anna’s income decreased from 75,000 to 65,000 for dull last year. The underwriter would take the average income of the last two years, assuming two incomes of $65k within two years. The calculated DTI and payment would be sufficient.

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Case Scenarios to Understand DTI Calculations and Increasing Income

Steady Job with Recent Raise

Scenario: It has been three years since Michael worked as an accountant. Last year, he made $70,000, and now, due to a promotion and enhancing his job responsibilities, he makes a $80,000 salary. He submitted a request for a mortgage; in the report, the underwriter referred to his recent pay stubs and employer’s confirmation letter and considered the DTI calculation based on the new salary. For outcome: His raise lowered his DTI, allowing him to qualify for a bigger loan.

Stable Job & Pay with That Having Recently Come Into the Picture

Steady Job with Recent Raise, Increasing Income with a Rising Trend: Scenario

Jessica works as a graphic designer but works even as such on a freelance basis. She has her own studio, and her earnings were $50,000 when she started. The following year, she earned $60,000. The underwriter in DTI annualized the insurance costs at $ 55,000.

• Outcome: In other words, there were fluctuations in income occasionally. However, the average income was acceptable, and quite appealing was the upward trend growth rate that influenced her average income.
• Non-Taxable Income Gross-Up Scenario: Linda receives tax-free monthly disability benefits of $1500. The lender estimated her income, which, in their opinion, provides a qualifying income of $1,875 a month by increasing her income by 35%.
• Events: This has enabled her to better the DTI ratio and be in a position to obtain a mortgage despite having a low income comparatively.

Two Increasing Income with Constant Growth

Scenario: Paul and Sarah have been married for some time now. He makes $80,000, and she makes $50,000, both of which, he tells the writer, have seen steady growth over the last three years. The underwriter considered both incomes in DTI, which helped them qualify for a more significant loan.

Outcome: Their incomes were ever-rising at the time.

New Position With Better Pay

Scenario: Daniel had a new position in the same field that paid considerably more than the previous role. This is even though he had not started at the new position. He wants the lender to include that employment in the mortgage application but has to wait until he gets his first paycheck after starting the job.

Outcome: Daniel’s future income helped him qualify for the loan, but he had a closing until he met the condition of providing proof of the income.

These examples illustrate how underwriters view and calculate income, particularly when it’s increasing income, to decide whether one is eligible for a mortgage.

This guide on how do underwriters qualify increasing income has been written and updated on September 10th, 2024.

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