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hi and welcome to loan officer school this is your how to calculate income training session once again i'm Sharman Lane please call me Shar cuz the toilet paper jokes got old by the third grade and done you can always reach me at Charmin out loan officer school comm and you can call our offices at eight six six six two three one two five zero once again visit our website at loan officer school comm we've got lots of programs and products and audios and be is that it can help you be a better loan officer alright income most primary types of income that you're gonna ever have to calculate are those off of w-2s pay stubs tax returns and a few extra things that you need to look at when it comes to self-employed borrowers now step number one is looking at a borrower's w-2 a whole bunch of numbers on it but what are you really looking for well you're going to need two years of w-2s so make sure that you're always requesting at least a minimum of two years you're also going to be looking at box five for Medicare wages and tips because this is how much a bar were actually earned but what they paid in one of their other boxes is what they were taxed on remember if you're contributing to some type of it IRA or a 401k that is done pre-tax dollars you made this money but you may not have paid taxes on it because you put it into some secured account so that's why you're going to be looking at your Medicare wages and tips box number five what you're going to do is look at both years of your box five for the last two years of w-2s you're going to add them together and then you're going to divide by 24 months to come up with the average this is going to be your monthly qualifying income now sometimes lenders are a little bit generous and they'll let you qualify just off of what the borrower's current salary is but if you got Commission bonuses and anything else at your regular over time you're going to have to use the average for those amounts because sometimes the dollar amounts can be inconsistent so you want to make sure that the that the borrower's are using the average amounts if it's some type of again commissions over time bonuses things of that nature so this is what some w-2s look like now depending on who your provider is your your payroll provider is they are all going to look a little bit different so what you want to do is just find box five it's gonna be located somewhere differently on every type of w-2 but you're gonna look at some general information so right here we've gone to barber who made forty two thousand seven hundred and twenty four dollars that year and this is in the year 2003 this is just a sample exam our sample example here so don't worry about that at there years two thousand three and four this is just a made-up w2 all right and then you've got another year of 2002 of fifty one thousand one hundred fifty eight dollars and fifty nine cents so what we're going to do is add those two years together or those two amounts together sorry about that we're going to add a bat amount we're gonna add up that amount we're gonna take that total and because it covers two years we're gonna divide it by 24 now sometimes you're lucky enough that a lender will allow you to use the current pay stub and average that amount with just the last year's w2 if that's the case you're going to be looking for the period ending date and divide by the number of days in that month then you're going to take the total number of months that the pay stub covers and you're going to divide that total by the total number of months you're gonna find the year-to-date gross amount and divided by the total number of months that that all equals so let me show you a little bit about what this looks like so first off what we've got is period ending dates this says August 20 2004 alright so that's the last that time that that borrowers pay period was calculated so this pay stub covers how many months well all of January through July plus 20 days of August you don't want to divide it by eight full months right because you don't have a full month of August yet now if this was dated August 31st easy you just divide it by a to cover all eight months of that year but in this example this pay stub doesn't go to the end of the month and most often borrowers get paid in the first or the time for the fifteenth or somewhere in between so this is why you need to know how to read a pay stub what you're going to do is you're going to again first look at your pay period ending so you know how many days or months to count then you're going to look at the year-to-date gross wages so in this example it is nine hundred ninety nine thousand at nine hundred dollars so that's the total year-to-date gross wages so this means within seven months and 20 days the borrower's made ninety nine thousand nine hundred dollars so let's just say that we've got the w-2 of the prior year so let's say we have a borrower who's made forty two thousand seven hundred forty two dollars all through the prior year and they've made ninety nine thousand wow they've had a big pay increase huh so ninety nine thousand nine hundred dollars through the current now year all right so that's a total of one hundred forty two thousand six hundred and twenty four dollars let me see if I can remember and I'm just gonna remind that up to one hundred and forty two thousand dollars so now I need to know how much time does this cover well first thing I'm going to do is go alright well what percentage of August have we covered so twenty days thirty days has September April June and November all the rest have thirty-one so August has 31 days in it you can also just look at a calendar but I don't happen to have one handy so I'm gonna take twenty days and I'm going to divide it by 31 so this pay stub covers all of January through July which is seven months plus 0.64 of August so now I'm gonna take twelve months because all of the prior year plus seven point let's just call it six zero that's going to equal nineteen point six months so I'm going to take that total of a hundred and forty two thousand dollars and I'm going to divide it by nineteen point six and that means my borrowers average income is seven thousand two hundred and forty four dollars per month and that is how you look at a w-2 and a pay stub to calculate income now that's not too hard of a formula you just have to remember which pieces and parts or what pieces of parts most important thing is periods pay period ending your year-to-date gross earnings and to make sure you're doing the math properly on the number of days covered in that month so that that way you have plenty of time are plenty of money to I calculate the borrower's debt ratios off of alright now that takes us to tax returns and red flags things that you need to pay attention to on an individual's tax returns if they are self-employed you're generally going to be looking at the line 36 which is the adjusted gross income you're going to take that number and divide it by 12 and that's going to give you the annual income for that borrower now some of the things you're going to be needing to look for on a tax return is if the borrower is paying alimony now borrowers have what I call selective amnesia and they may not tell you that they owe alimony every month but once you get their tax returns it shows on there that money is being paid or alimonies being paid to another social security number and that unfortunately is going to be calculated into the borrower's debt ratios so that's another reason it's important to get tax returns to make sure that there's no hidden debts the Devourer didn't accidentally forget to tell you about all right and then if there is a if page to is available on line 36 of the borrower's most recent 1040s has an amount higher than the standard deduction you want to make sure that you're looking at schedule a because they might be writing off things that could affect their ability to get the loan all right so um this is just a little bit of specific details on each section of the tax returns so let you read that on your own now when it comes looking at a borrower with self-employment again what type of self-employment are they if they're a sole proprietor they're just gonna file everything on their own 1040s but if they are a partnership and escort for a c-corp you might have 1120s or any other type of an additional report so or a return so you got to make sure that you're getting all the necessary documentation for each of your borrowers all right on the next worksheet is going to help you analyze what are positives and one or negatives you're going to be looking at certain different schedules k1 section Schedule C F 2106 is all of these different things that don't really mean much to you if you're not an accountant or a tax preparer but they are going to become important to you when it comes to your mortgage careers and calculating income properly so this is a great little in sample form that you can use it gives you the total so it just tells you to enter in the dollar amount their wages salaries so it's going to tell you to subtract this information here tax exempt income you're gonna add in that information there you're gonna take state and local tax returns and you're going to enter in all this information what's great is all you have to do is read these things you're gonna find that same definition or line on the tax returns are gonna fill in the amounts here and then you're going to subtract this one add this one subtract this one subtract this one depending on if it's an income or loss you're going to just add or subtract that one and then go all the way down until you get your final answer so it's a pretty handy dandy little tool now goes through each section of the tax returns which makes it even a more handy worksheet to use so again Schedule B your interest in dividend income you get to subtract that out Schedule C you're gonna do your plus or minuses here tells you what to look for on Schedule D again if you have a form 47 97 62 52 or a Schedule E you're gonna go here alright and then each one of these items is a description of what goes into each section you've got a Schedule F and information on partnerships which generally would be a k1 all right partnership information on a different form 65 10 65 or corporation income which is an 11 20s if it's an S corp alright regular corporate again a form 1120 and this is how you're going to fill this out so this is going to be a really great calculation and a great sample just a little sample worksheet to help you find out exactly how much you can use for this borrower to qualify and again a few additional pieces of information just to read up on a little bit later so you know what each section means on the credit report I'm sorry on the tax returns now a profit and loss statement is generally going to be required on all self-employed borrowers to make sure that they're not running their business today lower than what they were at on their prior year's tax returns so income is going to be everything that you are deriving your income over here and these are your expenses everything that comes out now most people know that people who are self-employed or run their own businesses they write off the Sun the moon and a kitchen think that as you see here accounting well most people might have an accountant to prepare their tax returns but they don't get to write it off simply because they don't run a business what about advertising or assets or electricity you don't get to write off a a truck electricity in your home right but as a business owner that's an expense and yes you can so these are again things that basically you're saying on your taxes you have to pay in order to run your business that's why they are taken out of your gross income when it comes to running your own business so you've got to subtract all your expenses from your income and you're able to qualify on the amount that is left over all right so again for all your other bonuses Commission's this is just a breakdown of all of the information you can read it on your own time but again it just gives a little bit of an explanation and each section of the tax returns or specifically broken down details on each section of the loan application so that you know what certain types of income is and how to calculate it alright that wraps up our section on how to calculate income make sure you go back and read all those other fine details so that you know what goes where on applications and when it applies to your borrowers loans thanks again and we'll hope to see you at a future event