Gross monthly income is your pay before anything comes out of it: federal tax, Social Security, Medicare, health insurance, 401(k) contributions. Every qualifying ratio divides by this number, so getting it right decides how much house the math supports.
Turning a paycheck into a monthly figure
Lenders convert each pay schedule the same way:
| How you're paid | Formula | Example | Gross monthly |
|---|---|---|---|
| Hourly | rate × hours a week × 52 ÷ 12 | $21.50 × 40 × 52 ÷ 12 | $3,726.67 |
| Weekly | weekly pay × 52 ÷ 12 | $950 × 52 ÷ 12 | $4,116.67 |
| Every two weeks | paycheck × 26 ÷ 12 | $1,850 × 26 ÷ 12 | $4,008.33 |
| Twice a month | paycheck × 2 | $2,100 × 2 | $4,200.00 |
| Salary | annual pay ÷ 12 | $58,000 ÷ 12 | $4,833.33 |
The every-two-weeks row is where buyers shortchange themselves. Two paychecks a month would be $3,700, but 26 paychecks a year works out to $4,008.33 a month, which is $308.33 more income on the application. At FHA's 56.9% total limit, that extra $308.33 supports about $175 more in monthly payments.
Pay that changes from check to check
Overtime, commission and shift differentials count when there's a track record. Lenders usually look for two years, and FHA and Fannie Mae can accept a shorter history, at least 12 months, when the income is steady and likely to continue. The lender averages what you earned.
Say you earned $6,200 in overtime two years ago and $7,400 last year. The lender adds them ($13,600) and divides by 24 months, which adds $566.67 a month to your base pay. If last year had been the lower year, the lender would generally use last year's figure.
Self-employed buyers qualify on net profit after business expenses, usually averaged from two years of tax returns. A business that grossed $90,000 and netted $54,000 counts as $4,500 a month.
Income that adds to the total
- A co-borrower's or co-signer's gross income is added to yours, and their debts come along with it.
- Untaxed income such as SSI, VA disability or child support is grossed up 15% on FHA and 25% on Conventional.
- Part-time and second-job income counts with a history, usually two years.
- On a 2 to 4 unit home you'll live in, 75% of the other units' rent is added to income (see rental income offset).
Money from someone who won't be on the loan, such as a roommate or a partner left off the application, doesn't count toward gross monthly income.
Enter your monthly gross on the home affordability calculator and it shows the price each program supports. If your pay includes overtime, commission or a second job, call AAA Capital Funding at 888-601-8344 and we'll work out the exact figure an underwriter will use.