How Do Mortgage Underwriters View Declining And Irregular Income?


How Do Mortgage Underwriters View Declining And Irregular Income?

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 employer pays the employee part check and part cash.

  • 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 underwriter’s eyes and mortgage guidelines, the person is classified as a part time employee
  • In order for part time income to be classified as qualified income, a two year seasoning requirement is mandatory
  • If 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 to 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

Declining And Irregular 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 because 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
  • 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 mortage
  • Home Buyers needs the 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 Declining And 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 needs to structure it the right way and meet income mortgage guidelines:

  • Worker working for same company
  • 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
  • In reality, employee is making 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 if:
    • Mortgage underwriter needs to feel confident that income is stable for next three years
    • Underwriter will need a verification of employment 
    • Since it has been declining from the previous two years, a 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 And Irregular 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 the income and job stability
  • 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 on this case scenario? 
  • On this case scenario, underwriter will go by her full time income
  • Underwriter will require at least 30 days pay check stubs
  • Written verification of employment from the employer is required
  • The declining and irregular income is totally understandable
  • A good 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 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 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 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.

Related> Mortgage underwriting in the United States

Related> Borrower employment and income

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