When you apply for a mortgage, underwriters don't just glance at your pay stub and move on. They follow precise formulas to convert each type of W-2 compensation into a monthly qualifying figure. Understanding these calculations helps you predict what income the lender will actually count.
Base salary and guaranteed hourly wages
Straightforward base salary is the easiest. If you earn $72,000 annually, the underwriter divides by twelve to arrive at $6,000 monthly qualifying income. Guaranteed hourly wages work the same way: multiply your hourly rate by scheduled hours per week, then by 52, then divide by twelve. A $25-per-hour employee working forty hours weekly qualifies at $4,333 monthly. Documentation requires recent pay stubs covering at least thirty days, your two most recent W-2s, and often a written verification of employment from your employer confirming position, hire date, and current salary.
Overtime, bonuses, and commissions
Variable income—overtime, bonuses, commissions—requires a two-year average because underwriters must prove continuity and likelihood of recurrence. The lender adds the total from the past two years, divides by twenty-four, and uses that monthly figure. If you earned $8,000 in overtime last year and $9,200 the year before, your qualifying overtime income is $717 monthly. The same logic applies to annual bonuses and commission payments.
Two important caveats. First, if your variable income declined year-over-year, the underwriter may average only the lower recent year or decline to count it altogether, depending on guidelines and your explanation. A bonus that dropped from $10,000 to $4,000 signals instability. Second, you need a full two-year history in the same line of work; a new job with overtime won't count until you've been there twenty-four months, even if your base salary qualifies immediately.
Gaps, job changes, and hybrid structures
Changing employers mid-stream doesn't automatically disqualify variable income, but you must stay in the same occupation and provide W-2s and pay stubs from both employers covering the two-year lookback. Unexplained gaps longer than thirty days may require a written letter of explanation. If you receive both base salary and bonus, each component is calculated separately and then summed—your $60,000 base yields $5,000 monthly, your two-year bonus average adds another $500, for $5,500 total.
The Alliance take
Underwriters are methodical, not arbitrary. The two-year rule for variable income exists because lenders need predictable cash flow over thirty years. If your overtime has been consistent and you can document it cleanly, it counts. If it's erratic or new, it won't. Gather twenty-four months of pay stubs, your last two W-2s, and a current verification of employment before you start an application—complete documentation turns a three-week underwriting slog into a ten-day approval.