Chapter 6: Income Types and Calculation
Overview
Income analysis is central to evaluating a borrower’s
ability to repay the mortgage loan. Accurate identification and calculation of
income ensure compliance with investor and regulatory guidelines. This chapter
explores the types of acceptable income, documentation standards, and
calculation methods.
Section 1: Employment and Income Verification
1. Wage/Salary Income:
- Documents
Required: Paystubs (30 days), W-2s (2 years), VOE (Verification of
Employment)
- Key
Elements:
- YTD
income matching frequency
- Hourly,
salary, overtime, bonuses, commissions
- Pay
consistency
2. Verification of Employment (VOE):
- Verbal
VOE within 10 days of note date
- Written
VOE required for variable or bonus income
3. Income Calculation Method:
- Hourly:
Hourly rate × average weekly hours × 52 / 12
- Salary:
Annual salary / 12
- Overtime/Bonus/Commission:
Avg. of 2 years, YTD support required
Section 2: Self-Employment Income
Required Documentation:
- Personal
tax returns (1040s) — 2 years
- Business
tax returns (1065/1120/1120S) — 2 years
- Year-to-date
P&L (audited/unaudited)
- Balance
sheet
Stability Requirements:
- Minimum
2 years self-employment
- Consider
1 year with strong compensating factors
Net Income Calculation:
- Use
Schedule C (sole proprietorship)
- Add
back depreciation, non-cash expenses
- Subtract
non-recurring income, large business losses
Section 3: Other Income Types
1. Rental Income:
- Lease
agreements
- Schedule
E of tax returns
- Depreciation
and expenses reviewed
- Net
rental income added to or deducted from income
2. Retirement Income:
- Pension
award letters, bank statements
- Consistent
and likely to continue for 3 years
3. Social Security:
- SSA
award letter
- Direct
deposit proof
- Gross
up if non-taxable (typically by 125%)
4. Child Support/Alimony:
- Divorce
decree/court order
- Proof
of receipt for 6 months
- Continuance
for at least 3 years
5. Disability or Workers Comp:
- Award
letters
- Continuance
likelihood required
Section 4: Variable Income Considerations
1. Bonus and Commission:
- Stable
for 2 years
- Year-over-year
trend
- Verify
employer expectation of continuance
2. Overtime:
- Consistent
over 2 years
- Supported
by VOE and paystub
3. Seasonal Employment:
- Acceptable
with 2-year history
- Example:
Construction, farming, holiday retail
Section 5: Unacceptable Income Sources
- Temporary
employment unless verified for 2+ years
- Unverifiable
cash income
- Lottery
winnings unless recurring
- Non-occupational
income (unless documented)
- Employer
loans or reimbursements
Section 6: Income Analysis Tools
1. Fannie Mae Form 1084 / Freddie Mac Form 91:
- Used
for self-employed income analysis
2. Income Calculators:
- Loan
Origination Systems (LOS)
- Excel-based
underwriter tools
- Agency
income worksheets
3. DU/LP Income Logic:
- May
accept lender calculations
- Manual
override possible with documentation
Section 7: Common Red Flags
- Declining
income over years
- Unverifiable
sources
- High
expense-to-income ratios
- Mismatch
with bank deposits
- Excessive
write-offs in self-employed returns
Section 8: Case Studies
Case 1: Borrower with Hourly and Overtime Income
- Reviewed
YTD consistency and 2-year history
- Overtime
accepted at average of prior years
Case 2: Self-Employed Borrower with Net Loss
- Income
declined and showed losses
- Loan
denied due to inability to repay
Case 3: Social Security Recipient
- Income
grossed up and verified via direct deposit
- Used
in DTI calculation effectively
Final Notes
- All
income must be stable, verifiable, and likely to continue for 3 years
- Use
conservative calculations where variability exists
- Reconcile
income data with credit, assets, and employment verification
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