Calculating Wage-Earner Income - Part 1

Written By: Frankie Lacy

Wage-earner income can be complicated when trying to determine the correct income calculation method. There are so many terms we hear in conjunction with income calculation such as: bi-weekly, semi-monthly, wage earner, base salary, and hourly wage. But what do these terms really mean and how do we apply them when calculating income?

First, let’s nail down the definition of a wage-earner. From a mortgage qualifying perspective, a wage-earner is a borrower that receives a wage from an employer that they do not have an ownership interest in. The wage-earner’s income is not varying based on production or sales in the way that commission or bonus income is.

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Wage-earners are paid an hourly wage or an annual salary. When a borrower is paid hourly, they receive a set amount for each hour they work. They are not paid for hours not worked, unless the company has a paid-time-off (PTO) plan. The hourly wage earner may have fluctuating hours worked in each pay period. As a result, their income is calculated differently from a salaried borrower.

Generally, we assume the hourly wage-earner has a 40 hour work-week. However, making this assumption can be a mistake. We must double check the paystubs to see if a 40 hour work week is supported. In addition, when we calculate the total annual income using the hourly wage, we must compare that amount to the W2’s. We do this to ensure our income calculation is supported. Here’s an example:
• $15 per hour X 40 hours per week = $600 per week
• $600 per week X 52 weeks per year = $31,200 total income for the year
• $31,200 / 12 months per year = $2,600 monthly income
• 2012 W2’s show $24,595 total wages earned

In this example, the 2012 W2’s do not support the 40 hour work week. The total wages earned in 2012 are significantly lower than the total annual income for a borrower making $15 per hour at 40 hours per week. So how do we proceed in this case? Rather than using a traditional calculation like the one above, we will utilize the year-to-date (YTD) and most current year’s W2 average.

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Step 1: Calculate the YTD number of months.
Example: Last pay date was July, 12.
• A full 6 months have passed (January through June).
• There are 31 days in July. 12 / 31 = .39 months.
• As a result, the YTD number of months is 6.39.

Step 2: Perform the calculation
• YTD earnings as of July, 12 are $13,750.
• 2012 W2 earnings were $24,595 (12 months).
• $13,750 + $24,595 = $38,345 / 18.39 months (6.39 + 12) = $2,085.10 per month.

As you can see, this calculation nets a lower and more accurate monthly income than the 40 hour work week calculation.

About The Author

Frankie Lacy - As an active NAMP® member and a NAMU®-CMMU designee, Ms. Frankie Lacy is a 13-year mortgage industry veteran with extensive conventional mortgage underwriting experience. Frankie is also a mortgage instructor for Mortgage Underwriter University ( 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. If you're interested in becoming a writer for NAMP®, please email us at:

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Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.