One of the more jarring moments in the mortgage process is when a borrower who earns a comfortable living learns that the lender is using a smaller number than the one on their offer letter.
It is not arbitrary. Understanding the logic helps you plan around it.
Base salary is the easy part
If you are salaried and have been in the role for a while, your qualifying income is close to your salary. A pay stub and a W-2 confirm it and there is not much to argue about.
Almost nobody’s compensation stops there.
Variable income gets averaged
Bonus, commission, overtime, and tips are treated as variable income, and variable income generally needs a two-year track record before a lender will count it.
When it does count, it usually gets averaged over that period rather than taken at its most recent level. Consider a hypothetical borrower whose commission was significantly higher last year than the year before. The lender is likely to average the two, not use the better one.
There is a reason. A lender is underwriting a loan that runs for decades, and one strong year does not establish a pattern.
The frustrating version of this is the borrower whose income is genuinely trending up. Averaging works against you when your trajectory is good. It is worth talking through before you assume you know your number.
Continuity matters as much as history
Beyond history, an underwriter wants evidence the income will continue. A commission structure that is standard in your industry and confirmed by your employer is easier to count than a discretionary bonus that could disappear.
If your employer will document that a portion of your compensation is expected to continue, that helps.
Self-employment is a different calculation
If you own a business, your qualifying income is not your revenue and it is not your draw. It is generally what your returns show after expenses, averaged over two years, with certain non-cash items added back.
This surprises a lot of business owners, and it is a large enough subject that we will cover it separately in April. The short version is that traditional documentation is not the only route. There are programs built for self-employed borrowers that work differently.
New jobs and recent raises
Starting a new job does not disqualify you, especially when it is in the same field at similar or better pay. A signed offer letter can often be used.
A raise is trickier. If you were promoted last month, your pay stubs and W-2s still reflect the old salary. Documentation from your employer confirming the new rate usually resolves it, but it takes an extra step.
Changing industries or moving from salaried employment to self-employment is the harder version. If either is on your horizon, call before you make the move, not after.
Why this is worth understanding early
Buyers who learn how income is calculated at pre-approval can plan around it. Buyers who learn during underwriting are usually already under contract.
If your compensation is anything other than a flat salary, a short conversation now will tell you what you are actually working with.
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