One of the basic requirements from both FNMA and FHLMC is for the underwriter to determine the stability of the income used to qualify.  This is where the concept of continuance comes in.  Sometimes I know the readers of this blog like to go deep into subjects like K-1 income or what can you use instead of distributions to support the K-1 income, but let us not forget about underwriting 101!

Income Stability Rules

In my training the 10 point underwriting process step 3 is the income evaluation step.  In this step I teach that all income must meet the following four statements:

  • Income must show stability to qualify
  • Income must continue 36 months after closing to qualify
  • Income must have a have a history to qualify
  • Income must have documentation to qualify

To be honest, most mortgage professionals don’t really struggle with the rules of “how long should my borrower be on the job”.  But amazingly enough I do get a fair amount of questions on things like alimony, child support, dividend income, or some forms of social security income.  The questions are always things like “how long do that have to receive a dividend before I can use it?” or “Is the 36 month rule applied from application date or the closing date”.

Well there is an easy way in one spot to get these 4 key statements answered and as an underwriter and to know what documents to ask for!  FHLMC 5301.1: General requirements for all stable monthly income updated last on (07/06/17) shows us the A, B, C’s of income continuance and what we need to do to use these forms of income.

Income Continuance Breakdown

Chart Section A
Income and earnings types typically without documentable continuance

This section contains the majority of the income types we deal with on a daily basis.

Examples of income without documentable continuance:

  • Overtime
  • Bonus
  • Auto Allowance
  • Fluctuating Pay
  • Self Employed Income

FHLMC Provides this guidance:

Income must be likely to continue for at least the next three years. The Seller is not required to obtain documentation to verify income continuance, absent any knowledge, information or documentation that the income is no longer being received or is likely to cease.

Chart Section B
Income types with documentable continuance
This section has the income that are commonly known to have a start date and finish date on them!

Examples off income with documented continuance:

  • Child support
  • Alimony
  • Interest
  • Royalty Payments

FHLMC Provides this guidance:

For income types with documentable continuance, the documentation requirements for each individual income type listed within Topic 5300 provide the minimum documentation required in order for the Seller to verify income continuance for at least three years.

Chart Section C

Income types that may or may not have documentable continuance

This section is the hardest section to deal with.  I have often said that being an underwriter you have to be a “Jack of All Trades” in the financial world.  You need a basic understanding of quite a few financial vehicles, insurance programs, and over all “how this guy get paid” thought process!

Examples of income that may not have documented continuance:

  • Long term disability
  • Short term disability
  • Supplemental SS income
  • Public Assistance Income

 

FHLMC Provides this guidance:

Certain income types are comprised of multiple income sources, each of which may have specific requirements with respect to continuance, whether defined or undefined. For this reason, this grouping of income types may or may not have documentable continuance.  For example, if the source of retirement income is Social Security retirement benefits, no additional documentation of continuance is required; however, if the source is a retirement annuity from an insurance company, there will generally be a defined term in which case continuance must be documented.

Well that is it for this week’s blog!  I did want to tell you we are just a few more weeks away from some exciting additional resources for underwriting education.   Stay tuned for more on these new tools launching in September!