Many people get paid as part salary and part bonus income. To the employee, it does not matter as long as it all adds up at the end, to the employer it is calculated differently for tax purposes but to the mortgage lender…………

 

…it is a whole new ball game. Simply put: old rules vs new rules.

 

Old rules: your bonus was added to your base salary and treated as one. You simply had to show that this was normal and that you would probably be receiving it for the next few years.  Most banks did not even care if the bonus and salary were shown separately and some did not even know what to do look for. As I have blogged about before, with Wall Street bonuses going down the drain, they are now using microscopes (instead of kaleidoscopes) to analyze one’s bonus.

 

New rules: The bonus must be solid with a two year history of receiving it and a three year GUARANTEE that you will be receiving it in the future.  A few things they banks will look at:

 

·         Is the bonus a set amount or does it fluctuate based on performance

·         What percentage of your total income is the bonus (the less the better)

·         Is it paid quarterly or one lump sum (quarterly is better)

·         Is it paid in the year it is due or the following year

·         Even though your employer says it is guaranteed, will it really be guaranteed or will it be decreased in years to follow

·         Are you in a job where good performance is mandatory to keep your job

·         Are you in an industry which relies on bonus income and can you get eliminated at the drop of a hat

 

 

Each lender might have their own caveats on the above or give their individual underwriter reviewing the file enough power to decide not to do your loan. So, explain to the loan officer and supply them with the documentation in advance for review. We ask for the latest paystub, employment verification with bonus and salary broken down over the last three years and a letter from Human Resources stating that you received the bonus for the last two years and will be guaranteed to get it for the next three years.  Make sure the loan officer speaks to someone in advance because you do not want to submit the loan and wait three weeks to be told they will not count your bonus!

 

Happy long weekend to us all!

 

Dale Siegel