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Basics of Underwriting Series: Analyzing Income
©2009 Fannie Mae. All Rights Reserved
Welcome to the Basics of Underwriting series. This series is an introduction to Fannie Mae’s manual underwriting guidelines. For information on using Fannie Mae’s automated underwriting technologies, Desktop Underwriter and Desktop Originator, please visit eFannieMae.com under the Training and Education tab. This module is an overview of the various types of income a borrower may rely upon in qualifying for a mortgage loan which are permitted per Fannie Mae’s Selling Guide. My name is Phil Corriveau and I’ll be your presenter today.
click the volume control. then move your mouse forward to raise the slider. To navigate between slides. here are a few tips to help you get the most out of this presentation: To hear the voiceover narration for each slide. click the Forward or Back arrows. If you need to adjust the volume. To start or stop the presentation. Or click a slide title on the Outline tab to go directly to any slide in the presentation. click the Play/Pause button. All Rights Reserved 2 Before we get started. You are encouraged to download and print out a copy of this course by selecting the Attachments menu at the top of this screen. make sure that the volume is turned up. To close the volume control.Slide 2 Tips for viewing this seminar ©2009 Fannie Mae. . click the icon above the slider.
. A borrower must have a history of receiving stable income from employment or other sources and a reasonable expectation that the income will continue to be received in the foreseeable future (usually for three years).com. For such cases. Social Security Disability Insurance benefits or Veterans Disability Compensation benefits. and likelihood of continuing is not always available from the current paystub alone. when a borrower has been generating income for two or more years from either part-time or full-time work with any number of employers. the documentation should indicate the income type. the lender does not need to look at an extended income history for the borrower.Slide 3 Course Objectives At the end of this presentation you will: Understand the types of income used to qualify borrowers Know how to document income ©2009 Fannie Mae. and likely to continue. the lender should assume that it will continue. There are other sources of income. predictable. When the lender believes or knows that the income falls in a category that does not have a defined expiration date. Please keep in mind that Desktop Underwriter and Desktop Originator offer more streamlined documentation requirements than those reviewed in this module. what type of documentation you will need for this income and where to find help in the Fannie Mae Selling Guide. Rather. its stability. In general. However. information that will help the lender better understand the nature of the borrower's income. among others) that do not have defined expiration dates. and likely to continue and is not expected to request additional documentation from the borrower. the lender may base its underwriting decision on the borrower's current income. We have no minimum history requirement for a borrower's receipt of income—as long as the lender can determine that the borrower's income is stable. such as certain types of disability benefits (for example. please refer to the Selling Guide and eFannieMae. unless there is evidence that the income will no longer be received. For more information on income documentation in DU. That is why we require the lender to obtain two years of documentation for a borrower's employment and income history. the lender may conclude that the income is considered stable. Please see the Selling Guide for additional information concerning disability benefits. All Rights Reserved 3 In this module I will discuss the various types of income that are used to qualify a borrower. predictable. Typically.
Slide 4 Establish How the Borrower is Paid Salary or Hourly Overtime. bonus or commission income? Does he or she have business expenses that are not reimbursed by his or her employer? Is he or she self-employed or an independent contractor? Is he or she employed by a family member? The answers to these questions are going to help you establish what types of documentation you will need. bonus or commission Unreimbursed expenses Self-employed or Independent Contractor Employed by family member ©2009 Fannie Mae. All Rights Reserved 4 The first element in determining how to document a borrower’s income is to establish how the borrower is compensated… • • • • • Is he or she paid a salary or hourly wage? Does he or she earn overtime. .
OR • A written verification of employment completed by the borrower’s employer which has not passed through the hands of any interested party to the transaction (including the loan officer). . All Rights Reserved 5 The borrower must be employed for two years without significant job gaps. There are two exceptions to this rule: First. This will indicate the minimum documentation that is permitted for your loan according to its unique risk characteristics. you’ll need: • The borrower’s most recent W-2 form for the previous year and a current paystub representing 30 days of year-to-date income that is less than 30 days old at the time of application. if the borrower has just graduated from school. such as transcripts for the last two years or a recently issued diploma or certificate. the time in school may be counted toward the two year requirement. along with their permission to reverify this information with the IRS. they only need to be employed for one year in order for the income to be eligible to be included in the transaction. you may find that reduced documentation will be indicated in the Underwriting Findings Report. To document this income. typically done with IRS Form 4506-T Remember. The second exception is when the borrower has just re-entered the work force after an absence to care for a family member. if you use DU or DO. You will need to obtain documentation of the borrower’s recent education.Slide 5 Base Salary and Hourly Income Eligible full-time income – Two year history – No job gaps Required documentation – One W-2 and a pay stub with YTD income – Verification of employment – 2 years of tax returns – Reduced documentation with DU ©2009 Fannie Mae. OR • Copies of the borrower’s most recent two years Federal income tax returns which the borrower has signed.
when reviewing a paycheck stub. If the borrower is paid semimonthly (on the first and fifteenth of the month. Remember that we are trying to establish the borrower’s willingness and ability to repay the mortgage loan for which they have applied. check to see if the borrower has any deductions for debts that are payroll-deducted. For instance. may not be reflected in the borrower’s credit report but should be counted as monthly recurring obligations when you calculate the borrower’s debt-to-income ratio. . All Rights Reserved 6 This slide provides you with a job aid of formulas for calculating monthly income.500 times 26 pay periods per year divided by 12 months equals a monthly salary of $5. his or her monthly income is $ 5. It is essential that your income data is correct and up to date. Some of these. for example).67.Slide 6 Calculating Income Hourly wage earner Hourly rate x # hours worked per week = weekly pay Weekly pay x 52 weeks / 12 months = Monthly Income Weekly salary Weekly rate x 52 weeks / 12 months = Monthly Income Biweekly salary (every other week) Biweekly rate x 26 pay periods / 12 months = Monthly Income ©2009 Fannie Mae. Also. Look at the dates for the pay periods to be sure that you are calculating income correctly. 500 per pay period. such as child support or a credit union loan.000. if you have a borrower that earns $ 2. they earn $ 2. and is compensated on a Bi-weekly basis. and earns the same $ 2.416. We will cover this in detail in the Assets and Liabilities Module of this series.500 per pay period.
you may not count bonus income that the borrower has not yet received. We cannot be assured that the new employer is going to have the same amount of overtime for the borrower or the same bonus structure . Also.Slide 7 Overtime and Bonus Income Two-year average Ensure it will continue Lesser documentation required with DU May not use overtime or bonus income from a new job – even when the previous job paid this type of income No projected income for bonus recipients ©2009 Fannie Mae. the borrower must have a two-year history of having earned it from the same employer. If the borrower has a new job with overtime or bonus income and also earned overtime or bonus on their previous job. All Rights Reserved 7 In order to consider overtime or bonus income as stable and recurring. you may not average the income from the former job. You also need to be assured that this type of income is likely to continue in the future.even if it is the same line of work. .
you may not use any year-to-date commission income from pay stubs. at least one full year on returns Establish an “earnings trend” . When you average income. you may need to investigate the causes before determining how to calculate the borrower’s income in a way that represents their actual current earnings.Slide 8 Commission Income Income is > 25%. All Rights Reserved 8 If 25% or more of the borrower’s income is derived from commissions. In calculating commission income. must review tax returns Average two years (no year-to-date) Less than two years. average the two years of commission income minus any unreimbursed business expenses that are shown on IRS Form 2106. . Is the income increasing from year-to-year? If so. you will need to analyze the borrower’s most recent two years Federal income tax returns. you also need to be aware of the earnings trend.if declining. may not average Unreimbursed expenses (Form 2106) ©2009 Fannie Mae. Using these tax returns. average both years. If you note a decline from the previous year.
. In some instances. it may be acceptable to use income to qualify a borrower who has worked a part time job for less than two years. This may be a borrower who has recently returned to the work force or who has taken another job to supplement previous part-time income or overtime income from his or her primary job that has been discontinued. If a borrower who has been working part time indicates that they are going to increase their hours to full time.Slide 9 Part Time Income & Second Jobs Uninterrupted employment for two years If going from part-time to full. All Rights Reserved 9 All part time or second job income needs a two year history to be counted as stable and recurring income. must verify Less than two years okay if: – Not less than 12 months – Borrower returned to workforce – Took part-time job to supplement lost overtime income ©2009 Fannie Mae. you must verify with his or her employer the number of hours they will be scheduled to work per week and the likelihood of continuance.
The borrower’s portion of the partnership income will be distributed to him or her via IRS Form K-1. Income is reported to the IRS according to the manner in which the business is organized. the reason for the decline needs to be determined and analyzed. the S Corporation files IRS Form 1120S and the borrower will receive IRS Form K-1 and will File IRS Form 1040. the partnership files IRS Form 1065 Partnership Return. You may calculate his or her wages from an average of the two most recent W2 forms. Schedule E to report his or her share of the S Corporation income. Schedule E. you will review the borrower’s most recent two years filed Federal income tax returns. we offer a companion recorded web seminar “Understanding Form 1084 for Self-Employed Borrowers”—which looks at Form 1084 line by line. A Sole Proprietor is required to report his or her income on IRS Form 1040. If you would like to learn more about self employment income. A Corporation files IRS Form 1120 and pays corporate taxes on its business income. S-Corp. Schedule C-EZ. and he or she will pay taxes on this portion of the partnership income on the personal tax return IRS Form 1040.com.Slide 10 Self Employment Income 25% or greater ownership in business Sole Proprietorship. If the business is organized as a Partnership (whether limited or general). you’ll find it on eFannieMae. Like this recording. or Corporation 2 years of income tax returns No longer need a profit and loss statement DU may require reduced documentation ©2009 Fannie Mae. Dividend and interest income from the corporation will be disclosed on Schedule B of IRS Form 1040. It may be more prudent to take an average of only the most recent twelve months’ income if this portrays a more realistic assessment of the borrower’s income. Partnership. . If the borrower’s income appears to be declining from year to year. Schedule C or IRS Form 1040-EZ. Remember that in underwriting the risk of a loan application we must review all the data presented to us. If the business is organized as an S Corporation. Typically. All Rights Reserved 10 The Selling Guide details Fannie Mae’s requirements for documenting income from a self employed borrower. The borrower may earn W-2 income from the corporation as well as dividends and interest.
Slide 11 Seasonal Income Two year history of income Reasonable assumption of returning Examples: – Outdoor workers. If you can document receipt of this income year after year and the likelihood exists that the income will continue for the next three years or more. This income may be verified on page 1 of the borrower’s IRS Form 1040. you may include this income in the borrower’s monthly qualifying income. Be sure to take an average over the most recent 24 months. Consistency is the key. income tax preparers. Seasonal workers may also receive unemployment compensation during their offseason months. All Rights Reserved 11 Any income that is consistent may be used to qualify a borrower…even if it is earned only on a seasonal basis. . holiday workers (unemployment income is acceptable) ©2009 Fannie Mae.
clothing allowance. but may be used as a compensating factor. Most VA benefits are acceptable if they are documented by a letter from the Department of Veterans Affairs and will continue for at least three years.Slide 12 Other Income Military VA income Notes Receivable Royalties Trust Income Capital Gains Rental ©2009 Fannie Mae. . A borrower must provide evidence that he or she has received the repayment funds for at least the past 12 months. A borrower may use up to 75% (minus PITI) of anticipated rental income for investment properties that are the subject property. Of course. quarters' allowance. rations. Income paid to military reservists while they are fulfilling their service obligations is also acceptable if it satisfies the same stability and continuity tests that we apply to other types of secondjob income. and proficiency pay are acceptable sources of stable income. Education benefits are not an acceptable source of income because they are used to offset actual education expenses. as long as the borrower will continue to receive the income. Flight or hazard pay. Please refer to the Selling Guide for the appropriate guidelines on rental income. Payments on a newly executed note may not be used as stable income. certain documentation requirements and other conditions apply. Payments on notes receivable must continue for at least three years. All Rights Reserved 12 Military personnel may be entitled to different types of pay. Fannie Mae requires a copy of the note to establish the amount and length of repayment.
In this case. take the monthly income TIMES 1. you may “gross up’ this source of income by 25%. In order to gross up non-taxable income. Retirement.25. Disability etc. may be grossed up by 25% Must have one year history of receipt and continue for three years ©2009 Fannie Mae. All Rights Reserved 13 Some income is not taxed by the IRS.Slide 13 Non-taxable Income The non-taxable portion of Social Security. The reason for this is that Fannie Mae’s debt-to-income ratio is calculated using pre-tax income because most borrowers’ are earning taxable income. The borrower must have at least a one year history of receiving the non-taxable income and it must be likely to continue for at least three years. Welfare. .
Social Security & Disability Determine if taxable or non-taxable May gross up 25% for non-taxable (Non taxable income x 1. Monthly direct deposit. they will have a job to return to.25 = grossed up income) Award Letter. copies of retirement award letters. You may be able to get a statement from an employer that when the borrower is ready. For Social Security benefits that have defined expiration dates. copies of signed federal income tax returns that were filed with the IRS. is where the underwriter needs to use common sense to make sure that the documentation obtained supports the establishment of continued income. the likelihood is that it will continue. 1099 Same requirements for continuance for three years ©2009 Fannie Mae. or medical doctor) to commit in writing that the likelihood of continuance of this income exists. or copies of the borrower's two most recent bank statements. If a borrower has been receiving social security disability for several years. they must have a remaining term of at least three years Acceptable verification of Social Security income includes a photocopy of the award letter. All Rights Reserved 14 Retirement or pension income is an acceptable source of stable income as long as the borrower's regular receipt of the payments is confirmed. It is difficult for anyone (social security. or copies of the borrower's recent bank statements. Documenting disability income can sometimes be challenging. This again. Retirement income may be verified by letters from the organizations providing the income.Slide 14 Retirement. . The lender must determine that the income is expected to continue to be received for at least three years. IRS W-2 forms. employer. copies of tax returns.
All Rights Reserved 15 When a borrower has been receiving payments for alimony or child support for at least 12 months. the income is considered stable income. the income may be considered stable income as long as it does not represent more than 30% of the total gross income that is used to qualify the borrower for the mortgage.Slide 15 Alimony and Child Support 12 months of receipt 6-12 months receipt – considered stable if it doesn’t represent more than 30% of the total gross income ©2009 Fannie Mae. When a borrower has been receiving payments for alimony or child support for between 6 and 12 months. .
alimony and child support income must be likely to continue for at least three years. Alimony and child support income must be verified with the appropriate pages of the divorce decree. if the income is adequately documented. settlement agreement or paternity judgment and the borrower must document timely receipt of the payments. When a borrower has been receiving full or partial payments for alimony. .although. the lender may use it to justify a higher qualifying ratio. As with other types of income. child support. All Rights Reserved 16 When a borrower has been receiving timely payments for alimony or child support for fewer than 6 months.Slide 16 Alimony and Child Support (cont’d) Less than 6 months .used as compensating factor Verify with the applicable pages of the decree Must have three years continuance ©2009 Fannie Mae. the income may not be considered as stable income -. the income may not be considered stable income and may not be used to justify a higher qualifying ratio. or maintenance on an inconsistent or sporadic basis.
With foster care income. a borrower may have approval to care for up to four children. . Please average the borrower’s foster care income over the last two years to provide stable and recurring income. The borrower must have a two-year history of providing foster care services.Slide 17 Foster Care Income Two-year history of providing foster-care services Likely to continue – If borrower has not received for two full years. but may have less than four children in their care at given moment. If the borrower has not received foster care income for a full two years. and it does not represent more than 30 percent of their total gross income. averaging is especially important. may count if at least a 12-month history of foster care and income does not represent more than 30% of the total gross income ©2009 Fannie Mae. you may count it as recurring income if the borrower has received it for at least 12 months. All Rights Reserved 17 Foster care income may also be used for qualifying. For example. and the foster care must be likely to continue.
please refer to the Selling Guide. All Rights Reserved 18 For a community lending mortgage.in an amount up to 30% of the borrower’s total gross income that is used to qualify the borrower for the mortgage. . This is acceptable if the boarder has lived with the borrower for the last 12 months and signs a statement stating that they intend to continue renting a room from the borrower for the foreseeable future. such as MyCommunity Mortgage. Remember…this income may contain a non-taxable portion that you may gross up by 25%. Income from public assistance may also be considered as acceptable stable income if it is properly documented. the rental payments that a borrower receives from a relative or non-relative who resides with the borrower may be considered as acceptable stable income -. For more details. Exception: Disabled borrower w/ live-in aide. welfare. has been received for the past two years. Food stamps.) where 30% may be used in ratios. Aid to Dependent Children.Slide 18 Boarder Income & Food Stamps Boarder income is only a compensating factor except for the Community Lending Mortgage (Fannie 97 etc. may also be used to qualify the borrower ©2009 Fannie Mae. and is expected to continue to be received for at least three years from the date of the mortgage application.
Other recordings cover traditional credit. and/or the terms of your Master Agreement or Master Commitment or any other contract you have with Fannie Mae. specific product guides. On this web site. eFannieMae. non-traditional credit. ©2009 Fannie Mae. I remind you that this recording is just one in our Basics of Underwriting Series. technology information. servicing and secondary marketing. which is held each year in various cities across the country and covers such topics as underwriting. There. Like this one. We hope you found it helpful. . summaries of Fannie Mae announcements. and other publications.Slide 21 Resources Printout of this course eFannieMae. you will find forms.com. you can access the recordings anytime on eFannieMae.com offers valuable information for lenders. and assets and liabilities. and that it does not modify and is not a replacement or substitution for the information found in the Selling/Servicing Guides. All Rights Reserved 21 Thank you for viewing this training. Additionally. Shown here are a list of resources if you want to find out more. you can also find out about the Housing Finance Institute.com – Announcements – Publications – Web seminar Housing Finance Institute™ Please be advised that the material provided in this training presentation is for informational purposes only.
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