Underwriting non-traditional income

Written By: Glenn Michaels

Borrowers have all kinds of income. Most have traditional income with a periodic pay stub and a W – 2 a long with a IRS form 1040 in order to determine the income and to verify the income. The self – employed borrowers have the appropriate tax documents to determine and verify their income.

Recently I had two different cases where the borrowers had non – traditional income. The first file the borrowers are paid in cash. There are no pay stubs so verifying the income is difficult to determine. The first borrower is a personal assistant for a very wealthy person living in Manhattan, New York.  The other borrower is the cook for the same wealthy man.

To determine the income we required the written Verification of Employment, W – 2 and the borroer’s tax returns for the most recent two years with all schedules.

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When the information is compared to make sure that the income matches up. We also check the Social Security Withholding and Medicare Withholding as it appears on the borrower’s W – 2 form. Every wage earner has social security or FICA withheld at 6.20% of their gross income or 6.20% of the gross income less pre – tax items.  The Medicare is 1.45% of the borrower’s gross income regardless of pre – tax items. If by chance the borrower earns $250,000.00 or more the Medicare tad will increase .90%.  If you do the math the social security and Medicare numbers should match. If the numbers do not work out correctly then there is probably a material misrepresentation in the file that needs to be investigated further.

Remember, social security has an income limitation and withholding limitation. If a borrower is employed with one employer during the calendar year the employer will have to refund the employee the overage if it is present in the loan file.  If a borrower works for more than one employer in a calendar year and their combined income exceeds the Social Security limits the borrower will receive the overage paid when they file their tax return. Always do the calculations for every borrower regardless how they are paid.

Each year the amount of social security withholding is set by the government and the underwriters s hould make sure a borrower has not exceeded the withholding limit. The cut offs are available by going to the University of Minnesota  social security limits (do a search under social security limits) or go the social security web site for the limits

Another file I received the borrower’s receive cash via pay envelopes. Each envelope has in ink the withholding for each borrower’s pay period.  The calculation for the income remains the same and in my file the numbers made sense and worked out.

If the numbers do not work out there could be a material misrepresentation in the file. In cases like that I usually give the file to my Quality Control Department to check the income and/or upper Management to make a determination if the file contains any material misrepresentation. 

If Quality Control or Upper Management decides to reject the loan file due to the payroll information in the loan file and if the loan is an FHA file we have to go into the FHA Connection and give the file a credit reject and explain everything. 

Fraud hurts everyone. Twice I was a government witness for two different federal mortgage fraud cases.  Don’t do it and do not participate in it if a loan has fraudulent information


About The Author

Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at:contact@mortgageprocessor.org.


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