Back to Understanding Basics – Part 3 of 3

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello Everybody – As an underwriter, I cannot tell you how many discussions I have had over whether or not income can be included for qualifying. Before I start – the most important issue is to read the pay stub very carefully. If you remember nothing else about this blog – remember this.

If the borrower is getting paid 80 hours per pay period – he is receiving 26 pays per year. If the borrower is getting paid 86.67 hours per pay period – he is receiving 24 pays per year.

If you use the wrong number of pays per year when figuring income – chances are, your borrower may not qualify for the mortgage. With all the mistakes that can be made – this is one that is inexcusable, as far as I am concerned.

OK – now that I have gotten that pet peeve off my chest; let’s move on. In this wavering economy there are going to many more questions regarding stability of income. FHA requires that two years of employment be verified with the borrower explaining any gaps over one month. If the borrower indicates he was in the military or in school, the borrower must provide evidence with military discharge papers or school transcripts.

A borrower who changes jobs frequently within the same line of work but continues to advance should be considered favorable.

If a borrower has recently returned to work after an extended absence the borrower’s income may be considered effective and stable if the borrower has been employed in their current job for six months or more and the borrower can document a two-year work history prior to the absence from the work force. You may accept traditional VOE’s – however, if the company is out of business you may accept W2’s or old pay stubs.

Bonus and Overtime Income. If a borrower is receiving bonus or overtime income and they need it to qualify for the mortgage – it must have been received for the past two years and it is likely to continue. You must also average two years of overtime and/or bonus income.

Part time Income. Part time and Seasonal income may be used for qualifying if the borrower has had this type of income for past two years. Examples that would be acceptable, if the borrower has worked at Christmas time for the past two years or has mowed lawns for two years and the income can be documented through W2’s or tax returns, the income may be used. If a borrower states they mow lawns every summer and the income is not on their tax return – it cannot be used. However, if it is – remember to back out the expenses of mowing lawns.

Military Income. In addition to base pay, military personnel may be entitled to additional forms of income. Income from housing allowances, clothing allowance, flight or hazard pay, ratios and proficiency pay is acceptable, provided its continuance is verified in writing.

Child Support. Income from child support may be used to qualify the borrower IF it is likely to continue for three years. The borrower must provide a copy of the final divorce decree, legal separation or voluntary payment agreement and well as evidence that payments have been received during the last twelve months. Copies of cancelled checks are acceptable, bank statements showing the deposit for 12 months or court records showing receipt of payment may be acceptable.

Automobile Allowances and Expense Account Payments. Only the amount by which the borrower’s automobile allowance or expense account payments EXCEED actual expenditures may be considered income. The borrower must provide IRS Form 2106, Employee Business Expenses, for the previous two years to establish the amount of income that may be added to gross income. It must also be verified that this income will continue. The borrower’s monthly car payment must be treated as a recurring debt – it may not be offset by the car allowance.

I feel I have outlined the most common types of income that are questioned when process or underwriting a loan. Believe there are many more types, Trust Income, Interest Income, Rental Income, and Government Program Income. The list goes on – however, I feel we have covered the most common.

If anyone has a blog idea, please feel free to let me know and I will do my best to cover it.

So until next week – keep processing. More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)