Written By: Frankie Lacy
Before an underwriter can determine the correct calculation for computing income, she/he must determine if there is sufficient data within the documentation submitted. The first place to reference when trying to determine whether you have the correct documents is your AUS findings. However, some findings reports give vague messages such as “refer to Fannie Mae Selling Guide”.
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To that end, we should also reference agency selling guides and investor lending guides. These guidelines will give detailed and comprehensive lists of the minimum documentation requirements for each specific income source. However, regardless of the AUS findings or the agency and investor guidelines, it is ultimately up to the underwriter to determine whether the documentation provided is sufficient to calculate income.
For example, a borrower may provide a paystub and last year’s W2 as required by the DU findings. However, if the borrower just recently started a new job, one paystub might not list enough information for the underwriter to complete the base salary calculation. If the first paystub from the new job does not contain a full pay period of earnings, at least one more paystub may be required. The underwriter may also choose to request a fully executed written verification of employment from the new and previous employers to determine that earnings are stable and continuing.
Another example is when a borrower has overtime or bonus earnings. Although the current year-to-date paystub may break out the base salary from overtime or bonus, the W2’s provided will not. As a result, the underwriter cannot execute the 24 month average required until they receive a fully executed written verification of employment.
Often borrowers who are in construction, education, public service, or sales have job related expenses that they write off on their tax returns.
These expenses can range from minimal to extensive and must be deducted from the borrower’s qualifying income. As a result, the underwriter will need the schedule A and Form 2106 from the personal tax returns, or at least the IRS tax transcripts, before calculating income.
Along the same lines, when a borrower has supplied tax returns and the underwriter notices partnership or s-corporation earnings on schedule E, additional documentation is required. The underwriter must review the K-1 from the business to first determine the percentage of ownership in that business. If the borrower owns more than 25% of the business, the borrower must supply the form 1065 or 1120S for the underwriter to review the business earnings and expenses. Until these items are received, the income calculation is incomplete.
Finally, an award letter is just the beginning to determining qualifying income for fixed income borrowers. If the income used is non-taxable, the borrower must supply the most recent two years tax returns to verify the non-taxable portion of their earnings. If the income is based on annuities, investments, or 401K instead of pension or social security, proof of at least two months receipt of the income is needed. In addition, the asset statement must be submitted to show a balance that can sustain at least 3 years continuance at the same rate of withdrawals.
As you can see, there are many scenarios in which the borrower or loan officer can submit income documentation that appears to be sufficient, but just isn’t enough. It is up to the underwriter to verify the borrower’s ability to repay through a thorough investigation of all income sources. The documentation provided must be analyzed to identify any trends of decline, interruptions in earnings, or other issues. The only way to complete the most thorough examination is to insure you have all the documentation you need.
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About The Author
Frankie Lacy - As an active NAMP® member and a NAMU®-CMMU designee, Ms. Frankie Lacy is a 13-year mortgage industry veteran with extensive conventional mortgage underwriting experience. Frankie is also a mortgage instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). Topics of Frankie's expertise include: Fannie Mae, Freddie Mac, USDA Rural Housing, underwriting to investor overlays, self-employed borrowers, personal and business tax return analysis, rental income, condos/co-ops/PUDs, and more. Frankie is a Davenport University graduate with a degree in Business Administration. If you're interested in becoming a writer for NAMP®, please email us at: firstname.lastname@example.org.