Your annual income is the amount of money you make during the year, annually.
You can figure out what your annual income is in a few different ways. If you‘re salaried, your paycheck stub will have that number on it somewhere. If you‘re hourly, you take what you make per hour, multiply that by the number of hours you work per week (on average), and multiply that by 52 for the number of weeks in a year. Also, for people with consistent jobs that have spanned a few years, your W-2 will tell you how much you made last year. You can use that to guestimate how much you’re going to, or should make, this year after you take into consideration any raises you might have received.
There are two types of annual income.
• Net Income
• Gross Income
Your annual net income is how much you make in a year, minus deductions including taxes, medical insurance, retirement, etc. This number is your salary, or hourly wage multiplied by hours and weeks with no deductions.
As part of the loan application, lenders will want to know what your annual income is. In most cases, a lender will want to know what a borrower’s Gross income is because this is the number most people know or are more comfortable with because this is a single number without consideration for deductions.
Lenders ask for a borrower’s income for two reasons.
• Evaluate debt-to-income (DTI) ratio
• Evaluate risk profile
To calculate the borrower’s DTI ratio, a lender will divide the borrowers outgoing debt payment by their gross income. Also, the DTI ratio itself will impact the loan process. All said and done, lenders prefer a DTI ratio of 36% or less on the back end.
Annual income is used to evaluate the potential for risk in a particular borrower because it shows lenders a pattern of consistency. When potential borrowers have been employed by the same employer for several years, this can show a potential lender that the borrower has a regular, reliable source of income, is more likely to make regular payments, and is less likely to default on a loan.