RateWatch #261 - Income for Mortgage Underwriting

July 28, 2001
by Dick Lepre

Bonds Like Bad News

Dreary earnings reports, layoffs and a dip in GDP growth were all timed when the weekly technical was bullish. This continued the nice little dip we have had in rates. Remember our caution - this is a bullish counter-trend in a broader bear market. Take advantage now.

Income

In RateWatch #374 we cover the self-employed borrower and the difficulties that we sometimes have in determining the income for self-employed folks. We should look at the broader picture and some problems that occur in calculating income.

Understand the idea behind this - people don't really care what you made last year except as it can predict what you will make in the future. What lenders want to see is stability. Stability is both job stability and income stability. If I were lending my own money I would come up with a scale. One one end I would put someone who worked for the Postal Service. By nature these seem to be people who are going to stay at their jobs. They are not likely to decide to become rich and start their own post office. They are not likely to decide that they want to go from a wage to a commission job at the same company. Next in predictability would be people who worked on the same job,for the same company for say, over 7 years. Their income would be at risk only if the company were at risk. The "portability" of their income would be in direct relationship to the lack of uniqueness of their job. If a person works at the zoo and the zoo is going to close in 3 months, their income is suspect.

At the other extreme are people who's income varies significantly from year-to-year. Real Estate salespeople and mortgage brokers are notorious examples. As a borrower you want to have a 2 year history of stabile income. Problems might arise if:

1) you were self-employed for less that 2 years
2) you were employed for less that 2 years
3) you have been employed but your income is decreasing

One good point to note here is that if you are changing jobs and want to buy a home soon and have the option of structuring your income as salary rather than commission you may be better off (from the point-of-view of mortgage qualifying) with salary rather than commission. There are some common exceptions that can be dealt with if a proper paperwork trail is created. If someone is a recent college graduate, with a degree and working at a solid company you should be able to qualify based on one year's record. If a woman's income decreased due to maternity leave and she is now working full-time, her annual income will be calculated from her present monthly pay rather than her W2.

Bonus or commission income will count only if it has a two year history and is not significantly declining. I have had cases where the lender allowed bonus income to be used if the borrower had worked for 1 year at a company that had a long history of bonus income. Interest income will count if the money will be there in the future. If you made money on interest last year and are using it all for a down payment then you will not be allowed to count the interest. Alimony income will count if it is going to be there for the next 5 years.

One-time events such as capital gains or income from litigations or prizes are not counted.

In the case of relocations where one spouse does not have a new job, some programs will allow the usage of a certain percent of the "trailing" spouse's income.

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