Per Diem, Overtime and the Bakken: Why Your Qualifying Income Is Smaller Than Your Deposits

If you work the field, you already know the number in your account does not match the number on your W-2. Per diem, overtime and bonus can be a third of what lands, and a lender can use almost none of the first item and only an averaged share of the other two.

Nobody writes about this honestly, because writing about it honestly means saying that a strong earner in eastern Montana can be approved for less than a salaried teacher with half the deposits. That is not a mistake in the system. It is the system working exactly as designed, and it is better to see it before you write an offer than after.

Per diem is not income

Per diem is a reimbursement for expenses you incurred: lodging, meals, incidentals while working away from home. The IRS treats a properly administered per diem paid under an accountable plan as a reimbursement rather than wages. It is not taxable to you, it does not appear as wage income, and it typically does not show in Box 1 of your W-2.

That last point is the whole story. An underwriter builds qualifying income from documented, taxable, likely-to-continue earnings. Money that was never reported as earnings is not earnings, no matter how consistently it arrives.

[keyfact] The rule of thumb: if it was not taxed, it will not qualify you. Untaxed per diem is money you genuinely live on that a lender generally cannot count. [/keyfact]

Two honest caveats. If your employer reports per diem as taxable wages (which happens when a plan is non-accountable or when amounts exceed the federal rate), then it is wages, and it may be usable under the ordinary rules for variable income. And there are separate rules for certain non-taxable income types that permit grossing up. Whether any of that applies to your specific arrangement is a question for the paystub and the W-2, not for a general article. Bring both.

Overtime and bonus: averaged, and vulnerable

Overtime and bonus are variable income. The standard approach is to establish a history, usually two years, average it, and confirm that the employer expects it to continue. Fannie Mae's guidance on bonus and overtime works this way, and Freddie Mac's is similar in structure.

Three things follow that matter a great deal in a rig-count economy.

A two-year average is a two-year memory. If the field slowed eighteen months ago and your overtime went to zero for two quarters, that zero is inside the averaging window and it pulls your qualifying number down for as long as it stays there. The month you apply changes the answer.

Declining variable income is treated conservatively. If this year's overtime is materially below last year's, an underwriter is not obligated to use the average. The lower recent figure can be used instead, and a steep decline can put the variable income in question altogether. The document that helps most here is a written statement from the employer explaining a company-wide or field-wide cause and confirming the expectation going forward.

Continuance is a real requirement, not a formality. The underwriter must have reason to believe the income continues. In an industry where everyone knows the work is cyclical, an employer letter addressing continuance carries weight.

Employment gaps and job changes in the same field

Moving between operators is normal in the patch and it is not automatically a problem. What matters is the line of work.

A job change within the same field, at the same or better pay, generally preserves your history rather than resetting it. Underwriters look at the continuity of the occupation, not the continuity of the employer. Where the new employer's structure differs (salary instead of hourly, a different bonus plan), the variable income from the old job may not carry cleanly to the new one, and you may need to establish some history in the new structure.

A gap of a few months, particularly a documented layoff during a downturn, is explainable. Write the explanation before you are asked for it: what happened, when you returned to work, and why the current position is stable. A short, factual letter that matches the paystubs is worth more than a long one.

A change into a different industry is the harder case, because the two-year history in the new line does not exist yet.

The documents that actually change the answer

Four items do most of the work, and three of them are free.

A written Verification of Employment. The full form, not the verbal. It shows base, overtime and bonus separately, year to date and for the prior years, which is exactly the breakdown the underwriter needs to average correctly.

A year-to-date paystub with itemized categories. If base, overtime and per diem are broken out as separate lines, an underwriter can do the math. If everything is lumped into one figure, expect questions and delay.

An employer letter addressing continuance. One paragraph on company letterhead saying that overtime is expected to continue at historical levels, and, if there was a slowdown in the window, what caused it and what has changed.

Two years of W-2s, plus returns if you also do 1099 work. A lot of field workers pick up side contracting. That income has its own rules: our piece on how underwriters average self-employed and seasonal income covers what happens when a W-2 and a Schedule C sit in the same file, and the self-employed page covers the programs.

[keyfact] Ask your employer for the full VOE and a year-to-date stub before you write an offer. Applying with the numbers already broken out is the difference between a clean approval and three rounds of conditions. [/keyfact]

It is also worth knowing what happens to the rate once the income question is settled, since non-conforming income documentation is only one of the inputs: what actually sets your mortgage rate walks through the rest of them in order.

The part most lenders will not say

Here is the honest framing, and it applies to Sidney and the Richland County area more than anywhere else in the state.

A town whose employment and home values track a single commodity is not the same risk as Missoula or Billings. When drilling activity is strong, wages rise, rentals tighten, and prices follow. When it turns, all three move the other way, and they move quickly. Montana's own labor data shows how concentrated employment is in the eastern counties compared with the western ones.

That does not mean do not buy. People live there, raise families there, and owning is often better than paying boom-cycle rent. It means three specific things.

Do not buy at your maximum. The maximum approval assumes today's overtime continues. Your own history tells you it might not. Qualify at the maximum if you like, then buy at a payment your base pay alone can carry, or close to it. Run both numbers on the payment calculators before you look at houses.

Think about the exit before the entry. How long do you plan to be there? If the answer is under three years, the transaction costs of buying and selling may exceed what you build in equity, particularly if the cycle turns while you own. Miles City and the other eastern markets have deeper, more diversified local economies than a pure oil-service town, and that shows up in how values behave.

Keep reserves. In a cyclical industry, months of payments in the bank are worth more than a slightly lower rate.

We would rather approve you for less than you asked for and have you keep the house through the next slowdown. If that means we are not the lender who quoted the biggest number, that is a trade we will make every time.

Bring the VOE, the year-to-date stub and two years of W-2s, and we will tell you what actually qualifies before you fall in love with a listing.