Step Four – Income

Income review is the step that requires the most detailed training and mentoring, there are so many ways that a person can earn money that this topic can prove challenging to underwriters.  Luckily for most income types once your learn how to calculate them is pretty black and white.  There really is not a lot of “left brain touchy feely no direct answer” logic. Instead it is more 9th grade level algebra math over and over again and most incomes can be agreed to within a few dollars per month.  Rather than go over 30+ different income types outlined in the FNMA/FHLMC guidelines and the rules of how to handle each, let’s just focus on the core questions you must answer when reviewing income.

Core Three Questions:

  1. What IS the borrower actually earning now (current year)?
  2. What HAS the borrower earned historically?
  3. Will the income continue for 36 months or greater?

The best way to explain these concepts is to show you some examples.


Example 1 Employed Borrower

Paystub shows $13.00 per hour (or weekly salary I will use hourly to keep it simple) so I complete the following math

First take $13 per/hr x 2080 hr/yr / 12 months / yr = $2253 per month to determine the “full time” pay

Take the YTD income and compare it to the full time income I just determined above
YTD = $11,454 as of the April 30th paystub
$11,454 / 4 months = $2863.50 per month average which is over the base of $2253
This answers the question what IS the borrower actually earning now (current year)

I can now compare the following
A) Monthly average for YTD only
B) Monthly average for the YTD and the most recent year
C) Monthly average for the YTD + the most recent year + the previous year
This answers the question what HAS the borrower earned historically

Review the documents and consider the information from the application to see if it is reasonable that this income will go forward for 36 months.  For most borrowers the answer is yes, but don’t overlook the obvious that may show you the borrower WON’T keep their current income.

  • Borrower states they are moving from South Carolina to Michigan… do they keep their old job?
  • The loan file shows a borrower is being evaluated for disability payments
  • The borrower is a temp worker with no history of working for a temp service for 2 or more years
    This answers the question will the income continue on for 36 months or more

By thinking about a borrower’s income in this complete math process instead of a single formula, you will avoid some major errors I have seen committed by very experienced mortgage professionals that have stopped loans from closing or worse caused an underwriter’s employer to lose thousands of dollars which does not bode well for long term employment as an underwriter.  This process will give you the hi level of quality in your income calculations, by pointing out major income errors such as:

  • The borrower is NOT working full time but is credited with full time income. A very common error made by underwriters is reviewing one paycheck with 40 hours and assuming that the borrower is in fact full time when the year to date numbers do not support full time wages.
  • You will recognize income trending and not qualify borrowers with unexplained declining income”
  • You will save time and effort by understanding if you will or will not need additional income documentation such as a VOE for overtime for example”

Example 2 Self Employed Borrower

Self-employed borrowers require the same three questions to be answered, but using a slightly different time line or review.

  1. What IS the borrower actually earning now (current tax year)?
  2. What HAS the borrower earned historically (previous tax year)?
  3. Will the income continue for 36 months or greater?

Step A
Review the most recent year proper tax return forms and determine what the most recent year income was for the borrower.  After you determine the annual income you will then convert that to a monthly income.  NOTE some loan programs require a current YTD profit and loss to also support “what is the borrower actually earning now”.  For this guide explaining the how, when, and what of profit and loss statements are a bit complex but I did want to mention them to accurately describe this step.

This answers the question what is borrower actually earning now.

Step B
Review the previous year proper tax form to determine the second year of income.

This answer the question what has the borrower been earning historically.

Step C
Is a more complicated step for the self-employed borrower, it requires the underwriter to review key points of the business tax returns to look for indicators the business will be ongoing for three or more years.   There is also others items outside the return you must consider.  In this guide I can’t explain all of these factors.

The question you answering in this step is will the income continue for 36 months or greater