Written By: Frankie Lacy, Op-Ed Writer
In the first part of this series we discussed the calculations for hourly wage-earners. Now let’s review salaried borrowers and the correct calculations for the various pay periods. Salaried borrowers have an annual salary that is disbursed throughout the year in structured pay periods. The most common pay periods are bi-weekly and semi-monthly. However, it is important to recognize all the pay-period types and know the correct calculations.
If a borrower is paid weekly, their pay is disbursed 52 times per year. Their pay cycles usually include 40 hours and 7 days per week. The calculation for a weekly borrower is: Weekly Salary X 52 = Annual Salary / 12 months = Monthly Qualifying income.
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Bi-weekly borrowers are paid 26 times per year. They are paid every two weeks, usually on Friday, but they may be paid another day of the week. The identifying characteristics of a bi-weekly borrower are an 80 hour pay period and exactly 14 days in each pay cycle. The calculation is as follows: Bi-weekly Salary X 26 = Annual Salary / 12 months = Monthly Qualifying Income.
The semi-monthly borrower is paid 24 times per year. Their pay cycles are twice per month on the 15th and the last day of the month. It is very easy to mistake a bi-weekly customer for a semi-monthly customer, and vice versa. Sometimes a bi-weekly borrower will have a pay cycle that falls on the 15th or the last day of the month. The deciding factors are the number of days within the pay cycle. If you count the number of days in the cycle and they exceed 14, you are most likely working with a semi-monthly customer. The semi-monthly calculation is as follows: Semi-monthly salary X 24 = Annual Salary / 12 months = Monthly Qualifying Income.
The monthly calculation is fairly straight forward. We simply use the monthly amount listed on the paystubs as the qualifying income. When reviewing salaried borrower income documentation, there is often a place on the paystubs where the borrower’s annual salary is listed. We can divide the annual salary by 12 and use that amount as the qualifying income.
Similarly to the hourly wage-earner, we always compare the salaried borrower’s calculation to their previous years earnings as displayed on their W2’s. A significantly lower amount may be an indication of a recent raise in pay or a leave of absence in the previous year. A significantly higher amount showing on the W2’s may be due to overtime, commission, or bonus earnings. The important thing to note here is that follow-up is required. When the income documentation raises questions due to a difference between the calculation and the previous year’s documentation, a letter of explanation from the employer or a written verification of employment (WVOE) is the most appropriate condition.
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When we understand the wage types and pay periods, we can perform accurate calculations and determine the correct qualifying income. A strong knowledge of income analysis also allows us to identify income that is not stable and continuing, making us a valuable risk assessment asset for our organization.
About The Author
Frankie Lacy - As an op-ed writer, Ms. Frankie Lacy is a 15+ year mortgage industry veteran with extensive conventional mortgage underwriting experience. Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration.
