In this blog, we will cover and discuss how mortgage underwriters view the declining and irregular income of borrowers.

There are certain ways lenders view declining and irregular income. There are many case scenarios where declining and irregular income can disqualify borrowers from obtaining a mortgage. There are case scenarios where a worker works 40 hours per week as well as overtime for an employer. However, there are cases where an employer pays the employee part check and part cash.

What is the Role of a Mortgage Underwriter?

They scrutinize documentation such as pay stubs, tax returns, and bank statements to verify the accuracy and completeness of the information provided. Additionally, underwriters evaluate property appraisals to ascertain that the property’s value aligns with the loan amount requested.

Tasked with assessing risk and ensuring compliance, underwriters meticulously review various aspects of each application, including the applicant’s credit history, employment status, and income stability, particularly in cases involving declining and irregular income.

In the decision-making process, they weigh factors such as the borrower’s debt-to-income ratio and the property’s marketability to determine whether to approve, deny, or conditionally approve the mortgage application. Communication with various stakeholders, including loan officers and borrowers, is essential.

Ultimately, mortgage underwriters play a pivotal role in maintaining the integrity of the mortgage lending process, ensuring that loans are underwritten accurately and responsibly, even when faced with challenges such as declining and irregular income situations. Speak With Our Loan Officer for Mortgage Loans

Declining and Irregular Income of Self-Employed Borrowers

There are small mom-and-pop employers where a percentage of the employee’s income is paid with payroll checks and the balance is paid in cash. Even though the employee is a full-time employee, under the underwriter’s eyes and mortgage guidelines, the person is classified as a part-time employee.

For Which Reason Would an Underwriter Reject a Risk?

If an underwriter rejects a risk, it’s usually to protect the insurer’s or financial institution’s interests. This is especially true in cases where the income is unstable or decreasing. Suppose the underwriter perceives that the applicant’s income is inconsistent or experiencing a downward trajectory.

In that case, it may raise concerns about the applicant’s ability to meet financial obligations, such as insurance premiums or loan repayments. Additionally, irregular income patterns can make it challenging for underwriters to accurately assess the applicant’s financial stability. More consistent income documentation must be needed to avoid concerns about the applicant’s ability to sustain the financial commitment of the insurance policy or loan.

Furthermore, suppose the underwriter determines that the applicant’s income volatility poses an unacceptable level of risk. In that case, they may reject the application to mitigate potential losses for the insurer or financial institution. In such cases, the decision to reject the risk is made after a thorough evaluation of the applicant’s financial circumstances and income sources, prioritizing the long-term stability and profitability of the organization.

What Does the Underwriter Look For?

Underwriters are critical in evaluating and assuming insurance coverage or financial securities risks. They meticulously analyze diverse factors, including the applicant’s financial stability, creditworthiness, and past performance, to assess the level of risk accurately.

Underwriters scrutinize the purpose behind seeking coverage or financing, ensuring compliance with regulatory standards and internal guidelines. Market conditions and industry trends are also thoroughly considered when pricing and coverage terms.

Through a detailed examination of loss history and the proposition of risk mitigation strategies, underwriters aim to make informed decisions that uphold the interests of the insurer or financial institution and the applicant.

By conducting a meticulous evaluation process, underwriters significantly contribute to maintaining the stability and profitability of the insurance and financial sectors. This role is vital in declining and irregular income scenarios, where precise risk assessment is paramount.

Can You Qualify For A Mortgage With Declining and Irregular Income?

In order for part-time income to be classified as qualified income, a two-year seasoning requirement is mandatory. If the W-2 payroll check is 30 hours or less, that employee is considered part-time status. Only the income that is declared can be used as qualified income.

Cash income is non-existent in the mortgage industry. Being paid by a company check but the employer does not take withholding taxes out cannot be used as income for income qualification. Click here to qualify for a Mortgage Loans

Declining Income In Mortgage Income Qualification

The case scenario in the above paragraph happens many times, especially with small businesses. Small businesses sometimes pay their employees part W-2 income and part cash. The reason they do so is that they can save on payroll taxes. Is it illegal? Maybe, but it would take too much manpower from the IRS to crack this business practice down since many businesses are still doing it.

The Benefits of Being A Self-Employed Wage Earner

In a way, it benefits the worker since they only pay taxes on part of their actual income. However, it ends up hurting the worker when they need to qualify for a mortgage. Home Buyers need full-time qualified income in order to qualify for a mortgage.

Declining and irregular income is viewed differently by each mortgage lender. One mortgage underwriter will view a particular case of declining and irregular income differently than another mortgage underwriter.

Mortgage Guidelines On Irregular Income

There are many instances where a borrower got denied by a mortgage underwriter because his W-2 income kept on declining year after year. Loan Officers need to structure it the right way and meet income mortgage guidelines. Workers working for the same company. An employee is making more and more money every quarter over the past 2 years. But the company was paying over half of his income with a personal check and not deducting his payroll taxes.

Verification of Employment and Income

In reality, the employee is making a good income but on paper, only half of his actual income is documented income. The mortgage underwriter needed a letter of explanation from the borrower as well as a verification of employment. This is how the mortgage underwriter can approve this borrower.

The mortgage underwriter needs to feel confident that income is stable for the next three years. The underwriter will need a verification of employment. Since it has been declining from the previous two years, verification of employment from the employer stating that the worker’s employment is likely to continue for the next three years was required. The past six months of qualified income will be used as the income.

Other Cases Of Declining Income

Mortgage lenders require two years of tax returns and W-2s for a reason. They want to see borrowers will have a stable job and consistent income so they can afford to pay their monthly mortgage payments once loan funds. Past performance is a good indicator of future prediction on income and job stability.

Legitimate Reasons For Declining and Irregular Income

There are cases of declining and irregular income. For example, a person could have had a baby and taken some time off. Then went back to work full time. However, due to the loss of a nanny and/or babysitter, the worker could have taken several months off. Then had her mom or in-law move in with them to care for their child.

She then goes back full-time and makes her normal wage. What happens in this case scenario? In this case scenario, the underwriter will go by her full-time income. The underwriter will require at least 30 days of paycheck stubs. Written verification of employment from the employer is required.

Declining and irregular income is totally understandable. A well-written letter of explanation will explain why the mortgage loan borrower had declining and irregular income.

Cases Where Borrowers’ Income Cannot Be Used Due To Declining Income

Self Employed borrowers where they had a significant drop of income on their most recent year may not qualify for a mortgage. If a borrower made $80,000 one year and $20,000 the next year, this is a significant drop in income. Since this is a significant drop in income, most lenders will not average the two years.

They may only use the $20,000 income or they may disqualify the borrower altogether due to the significant drop in income. If the borrower had $80,000 in income and the income declined to $60,000, the underwriter may not average the two year but rather use the $60,000 income as qualified income.

However, if the borrower made $60,000 and had increased income to $80,000, then the two years of income will be averaged.

Declining and Irregular Income Is Viewed On a Case By Case Scenario Basis

Declining and irregular income is reviewed on a case-by-case basis. Just because one mortgage underwriter feels a borrower is too risky to approve the loan does not mean another mortgage underwriter will view it the same way.

If one mortgage underwriter denies the loan due to declining and irregular income, the mortgage application needs to go to a different lender in order for another underwriter to underwrite the mortgage application. Talk to us for Mortgage Loans

Can an Underwriter Reject an Appraisal?

Yes, an underwriter can reject an appraisal, though it’s rare. This decision might be particularly critical in instances involving declining and irregular income. If the underwriter perceives discrepancies or inaccuracies in the appraisal report that could affect the lender’s risk exposure, they may reject it.

For example, suppose the appraisal fails to consider declining property values in the area or concerns about the accuracy of comparable sales data due to irregular market conditions. In that case, the underwriter might question the validity of the appraisal.

Additionally, suppose the appraisal needs to adequately account for the potential impact of the applicant’s irregular income on their ability to maintain the property or make mortgage payments. In that case, the underwriter may reject it to mitigate the lender’s risk.

However, it’s essential to note that underwriters typically rely on the expertise of licensed appraisers and will only reject an appraisal if they have valid reasons to believe it does not accurately represent the property’s value or condition, especially when considering the applicant’s financial circumstances.

In such cases, the underwriter may request a revised appraisal or additional documentation to ensure an accurate assessment of the property’s value, thus safeguarding the lender’s interests.

FAQ: How Mortgage Underwriters View Declining And Irregular Income?

1. What is the role of a mortgage underwriter, particularly concerning declining and irregular income? Mortgage underwriters evaluate loan applications, paying close attention to income stability, especially in declining or irregular income cases. They review various aspects, including credit history, employment status, and income documentation, to assess risk accurately and scrutinize property appraisals to ensure alignment with the loan amount requested.

2. Can an underwriter reject an appraisal? Yes, an underwriter can reject an appraisal, although it’s uncommon. This decision becomes critical, especially when considering declining and irregular income scenarios. Suppose discrepancies or inaccuracies are perceived that could impact the lender’s risk exposure.

In that case, the underwriter may reject the appraisal, requiring a revised appraisal or additional documentation for an accurate property valuation.

3. For which reasons would an underwriter reject a risk? Underwriters reject risks to protect the insurer’s or financial institution’s interests, particularly when income stability is in question. If an applicant’s income is deemed inconsistent or declining, underwriters may reject the risk to mitigate potential losses.

Irregular income patterns may pose challenges in accurately assessing financial stability, prompting the need for comprehensive income documentation.

4. Can declining or irregular-income borrowers still qualify for a mortgage? Yes, borrowers with declining or irregular income may still qualify for a mortgage but may face additional scrutiny. Underwriters typically require consistent income documentation over two years to accurately assess stability.

While considered on a case-by-case basis, borrowers may need to provide explanations and additional documentation to demonstrate their ability to afford the mortgage.

5. How are declining and irregular income viewed in mortgage income qualification? Declining and irregular income scenarios are evaluated differently by each mortgage lender. Some may require stable income over the past two years, while others consider explanations and additional documentation. Factors such as past performance, legitimate reasons for income fluctuations, and employment verification play crucial roles in underwriting decisions.

Related> Mortgage underwriting in the United States

Related> Borrower employment and income

This blog about How Mortgage Underwriters View Declining And Irregular Income was updated on March 29th, 2024.