How Underwriters Qualify Income In Mortgage Process
How Underwriters Qualify Income:
Mortgage loans must be documented in accordance with FHA Policies and the AUS findings. Only income that meets FHA standards for stable income should be included in the AUS submission. Typically, FHA defines stable income as income that has been received for at least 2 years and is likely to continue for at least 3 years.
How Underwriters Qualify Income With Borrowers?
Written verification of employment, also known as VOE, and the borrower’s most recent paystubs; or
Original pay stub(s) covering the most recent 30-day period and original IRS W-2 forms from the previous two years. (Note: Any copy of the IRS W-2 not submitted with the borrower’s tax return is considered an “original”. The original may be photocopied and returned to the borrower) and verbal verification of all current employers. File must also contain a certification that all original documents were examined.
A fully completed 4506-T is required on all borrowers for all loans, except Non-Qualifying Streamline Refinance transactions.
Tax return transcripts must be provided for each year of income documentation.
Income reported on the transcript must support the income entered in the AUS system.
Any major discrepancies between the income verified in the file and tax transcripts must be reasonable and supported by documentation in the file.
Verbal VOE must be completed by a closer within 5 days of closing.
How Underwriters Qualify Income: Child Support, Alimony, Maintenance Income?
May be considered effective income if:
Payments are likely to be received for the first three years of the mortgage, as documented by a divorce decree, legal separation agreement, court order, or voluntary payment agreement, and
If borrower can provide evidence that payments have been received for the last 12 months, such as cancelled checks, deposit slips, tax returns, or court records. Note: Loans approved by TOTAL Scorecard, only require a three month history of receipt.
Periods less than 12 months may be acceptable if the payer’s ability and willingness to make the timely payments is documented.
How Underwriters Qualify Income: Commission Income
Must be averaged over the previous two years.
Borrower must provide copies of signed tax returns for the previous two years and the most recent paystub.
Commission income showing a decrease from one year to the next requires significant compensating factors in order to use the income.
Commission income received for more than 12 months but less than two years may be considered as effective income if the lender can document the likelihood that the income will continue and can rationalize the use of the income.
Commission income received less than 12 months may not be considered as effective income, except in instances that the borrower’s compensation changed from salary to commission within a similar position with the same employer.
Un-reimbursed business expenses must be subtracted from gross income.
Borrower Employed By Family Member
In addition to standard income documentation, borrower must provide evidence that he/she does not have ownership in the business. Acceptable documentation includes:
Copies of signed personal tax returns, or
Signed copy of the corporate tax return showing ownership percentage.
How Underwriters Qualify Income: Borrower Returning to Work
A borrower who is returning to work after an extended absence of six months or more is eligible subject to the following: Current employment of at least six months
Documentation of two years of employment prior to the absence. Acceptable documentation includes W-2 forms, paystubs, or written verification of employment.
Acceptable scenarios include an individual who took several years off to raise children, but has now returned to work.
How Underwriters Qualify Income: Employment Gaps
Manually underwritten loans: The borrower must explain any gaps of employment that span one month or more.
AUS approved loans: The borrower must explain any gap in employment greater than 6 months.
Allowances can be made for seasonal employment, if documented.
How Underwriters Qualify Income: Non-Taxable Income
Non-taxable income such as child support, public assistance, foster care and disability income may be acceptable provided the stability of such income as well as the likelihood of continuance for the first three years of the mortgage is documented. In addition, if a particular source of regular income is not subject to federal taxes, the amount of continuing tax savings attributable to the non-taxable income source may be added to the borrower’s gross income. The lender should use the tax rate used to calculate last year’s income tax for the borrower. If the borrower is not required to file a federal income tax return, the tax rate to use is 25 percent.
Rental Income/Boarders income
Income from roommates in a single family property occupied as the borrower’s primary residence is not acceptable for qualifying.
Rental income from boarders is acceptable if the boarders are related by blood, marriage or law. The rental income may be considered effective if shown on the borrower’s tax return. If not on the tax return, rental income paid by the boarder may be considered as a compensating factor, and must be adequately documented by the lender.
Rental income from the property being vacated may not be used to qualify for the new mortgage. The applicant must qualify using the full PITI payment of the vacated property, even if a lease is provided. Exceptions are allowed as follows: The borrower is being relocated with a new or by a current employer to an area not within reasonable and locally recognized commuting distance. A minimum 12 month lease is mandatory and evidence of receipt of the security deposit and/or first month’s rent should be considered as supporting documentation.
The applicant has an LTV of 75% or less determined by either a current (no more than 6 months old) residential appraisal (2055 or full appraisal) or by comparing the unpaid primary balance to the original sales price of the property (documentation verifying both is required e.g. copy of current mortgage statement and copy of original HUD-1).
Rental income from a 2-4 unit property in which borrower occupies one unit may be used for qualifying purposes. Projected rent for the tenant occupied units may only be considered as gross income, after deducting the applicable Homeownership Center’s (HOC) vacancy and maintenance factor. Rental income may not be used as a direct offset to the mortgage payment.
The maximum mortgage is limited so that the ratio of the monthly mortgage payment (PITI plus HOA dues, if applicable) divided by the monthly net rental income does not exceed 100%.
The monthly payment includes principal, interest, monthly mortgage insurance, taxes, insurance, and HOA dues computed at the note rate.
Net rental is the appraiser’s estimate of fair market rent from all units, including the unit the borrower will occupy, less the applicable HOC’s vacancies and maintenance factor.
The projected rent may be considered only as gross income for qualifying purposes, and not used to offset the monthly mortgage payment.
Other Rental Properties
Rental income from properties currently owned by the borrower may be used subject to the following: Current lease or Agreement to Lease (acceptable only if the borrower obtained the property after the last tax return was filed). Reduce the gross rental amount by 25% (or the applicable HOC’s vacancy and maintenance factor)
24 months rental history that is free of unexplained gaps greater than three months. Gaps could be explained by student, seasonal, or military renters, or property rehabilitation.
A borrower who owns 25% or more of a business is considered self-employed
Self-employed income may be considered in effective income if the borrower has been self-employed for two years or more.
If self-employed less than two years, the borrower must have a minimum of two years of employment in the same line of work. A combination of one year of work and formal education or training in the same line of work is also acceptable.
Borrowers who have been self-employed for less than one year are not eligible.
If a borrower provides quarterly tax returns, the income analysis may include income through the period covered by the tax filings.
If the borrower is not subject to quarterly tax returns, or does not file them, the income shown on the P&L statement may be included in the analysis, provided the income stream based on the P&L is consistent with the previous years’ earnings.
If a P&L statement is provided and shows an income stream considerably greater than what is supported by the tax returns, the income analysis must be based solely on the income verified through the tax returns.
If the earnings trend for the previous two years is declining and the most recent tax return or P&L is less than the income from the previous year’s tax return, the borrower’s most recent year’s tax return or P&L must be used to calculate his/her income.
Gustan Cho NMLS ID # 873293