융자지식 274- Income Guidelines

by usezloan | Mar 31, 2022 | Financial study

융자지식 274-5.6,7,8,9 5.6 Income Guidelines

5.6 Income Guidelines
The two biggest things that lenders look for in income (and employment) are stability and consistency.
In order for most kinds of income to count (especially for variable income such as overtime or bonus
income), lenders will also want to receive confirmation that income is likely to continue. For example,
all income with an expiration date (child support, alimony, long-term disability programsfor example)
must be likely to continue for at least three years after the loan closing.
A quality source of income is one that is reasonably reliable, such as income from an established
employer, government agency, interest-yielding investment account, etc.
A durable source of income can be expected to continue for a sustained period. Permanent disability,
retirement earnings, and interest on established investments clearly are durable types of income.
Temporary unemployment benefits are unlikely to be counted.
To be considered durable, bonus, commission, and part-time earning types of income must be shown
to have been a consistent part of the borrower’s earnings for two years.
• Standard income documentation: For salaried and hourly individuals, this typically includes
paystubs for the most recent 30-day period and W-2s for the most recent two-year period.
• Commission Income: Lenders will require copies of income tax returns for the past two years
and information on current income if commissions represent 25% or more of an applicant’s
annual income. In order to account for the variability of an applicant’s commissions, lenders will
average the past two (2) years of income.

• Overtime and Bonus Pay: In order to account for the variable income such as overtime or
bonus income, lenders will average the past two years.
• Non-Taxable Income: Grossing Up – Some income sources, such as permanent disability
payments, Social Security benefits and child support, may be exempt from federal income
taxes. Most investors/governmental agencies allow the lender to calculate how much tax the
borrower would pay if this income were taxable and add that figure to the gross amount
received. This procedure is known as grossing up. The allowable “gross up” factor is usually
25%; in other words, the non-taxable income can be multiplied by 125% to adjust it accordingly.
• Rental Income (Other Real Estate Owned): If the borrower wishes to use rental income as a
way of qualifying for a loan, the loan originator should obtain 1040 tax returns, complete with
all schedules, including Schedule E. If 1040 tax returns cannot be used, the lender will calculate
the rental income by 75% of the amount shown on the lease agreement. Generally, a 25%
vacancy/maintenance factor should be subtracted from the monthly gross rent (thus the 75%
mentioned earlier).
• Unemployment Compensation: For applicants whose work is seasonal, unemployment income
can be used as part of qualifying income. Some trades, such as fishing, construction and farm
work, are seasonal with regular down time. During this time, most workers receive
unemployment. If unemployment is part of the natural annual work cycle, then it may be
included in qualifying income. The loan originator should obtain two years’ copies of tax returns
and average both the employment income and the unemploymentincome. In general,
unemployment compensation received due to layoffs or termination cannot be used as
qualifying income.
• Self-Employed Borrower: If an applicant is self-employed, the loan originator should obtain tax
returns for the past two years. Twenty-five percent of income derived from 1099 income is
considered self-employment and 25% or more ownership in a business is also considered selfemployment.
• Disability payments count as income if they are a permanent source of income, but the
lender will use caution if they are only for a limited time. If the benefits have a defined
expiration date, the remaining term should be at least three years from the date of
the mortgage application. Creditors should review the borrower’s disability award
letter to determine if the disability income is taxed or non-taxable. Not all disability
payments are income tax-free.
• Social Security income counts as permanent income for a borrower who has reached
retirement age. If these payments are the result of a disability or some other condition
, the lender treats them like other disability payments and requires no greater amount
of documentation than what is imposed on a regular-paid employee.
• Pensions and Retirement Benefits -Lenders generally consider pension and retirement
benefits as stable income, although they may investigate the source to determine
solvency.
• An auto allowance is an amount an employer gives an employee for the business use
of her car. This amount of reimbursement may be offset by deducting actual expenses
from the allowance. The remainder is considered taxable income by the IRS and when
averaged for the previous two years is considered income for loan qualification.

• Alimony, child support, and/or maintenance can be considered part of the borrower’s
monthly qualifying income if it’s determined they are likely to be made on a consistent
basis. Such a determination is dependent on whether the payments are required by
written agreement or court decree, the length of time the payments have been
received, the age of the child (child support payments generally stop at age 18), the
overall financial and credit status of the payer, and the ability of the borrower to
compel payment if necessary (e.g., through a court order). They should be expected to
continue for a minimum of three years to be used in income calculations. They do not
need to be listed as sources of income if a borrower does not want them considered
for the loan, per ECOA. To verify receipt of income, the borrower must verify child
support payments either by six months of cancelled checks or six months of
consecutive bank statements showing child support/alimony deposits.
• Foster Care Income – Qualifying payments for foster care are generally not taxable,
according to IRS Publication 525. To fully document the income for use in loan
qualification, an MLO must:
o Obtain a letter from the state agency case worker to substantiate the foster
worker’s placement and that the placement of children will be ongoing.
o Document receipt of reimbursement for the previous 24 months. Because the
income will likely be sporadic and change monthly, use a 24-month average.
o Place a letter in the loan file from the borrower stating he intends to continue
with foster care.
5.7 IRS Form 4506-T
Due to the prevalence of overstated income and the potential for tampering with income documents,
many lenders require authorization from a loan applicant to conduct an independent verification of
tax records. This independent verification is often performed for self-employed borrowers but is
becoming more common with other types of borrowers. The IRS Form 4506-T is used to obtain a
transcript of tax returns. IRS Form 8821 is used to authorize the release of other tax information.
5.8 Credit Report
Credit scoring is an objective means of determining creditworthiness of potential borrowers
based on a number system.
A credit score is a numeric representation of the borrower’s credit profile compiled by
assigning specified numerical values to different aspects of the borrower. These numbers are
adjusted up and down based on the strengths and weaknesses of particular qualifications.
The numbers are added from all the categories and a credit score based on these various
criteria isassigned.
Credit scores also play an important role in automated underwriting since Fannie Mae and
Freddie Mac have identified a strong correlation between mortgage performance and credit
scores. The higher the score, the better the credit risk. The lower the score, the higher the
risk of default.

The loan originator will order a credit report from one or all the credit bureaus in order to review
the applicant’s credit history. This is a record of debt repayment, detailing how a person paid credit
accounts in the past as a guide to whether he is likely to pay accounts on time and as agreed in
the future.
The Fair Credit Reporting Act indicates that consumer reporting agencies may maintain
bankruptcy information on a consumer’s credit report for no more than 10 yearsfrom the date
of entry of the order for relief or the date of adjudication, whichever the case may be.
Generally speaking, however:
• Chapter 7 bankruptcy (Liquidation ) and Chapter 13 (wage earner plan) remain on a credit
report for ten (10) years.
• Derogatory accounts may only remain on a borrower’s credit history for seven (7) years.
Credit scoring is considered an objective means of determining creditworthiness of potential
borrowers based on a numbersystem. Calculated differently by all credit bureaus, although
credit scores range from about 300 to 850. The three most familiar credit bureaus are: Experian,
Equifax and TransUnion.
5.9 Tangible Net Benefit
Refinancing can be a good choice for many applicants, and there are many reasons to refinance a
mortgage. For example, someone may be looking for a lowerrate and mortgage payment ormight be
looking to pay off higher interest debt, such as credit cards(in which case, the possibility exists that the
rate on the new mortgage loan may actually be higher than that onthe existing loan).
Often, people may want to shorten the term of their loan (i.e., go from a 30-year term to a 15-year
term) or take cash out to help their children pay for college.
• Whatever the reason for refinancing, borrowers must be receiving some sort of positive
outcome by doing so, otherwise known as a “tangible net benefit”; that is, there must be facts
about the new loan that make it in the interest of the applicant to proceed.
• Refinancing a loan with no tangible benefit to the borrower is called loan flipping, which is an
abusive practice and considered loan fraud. Loan flipping is a form of equity stripping – a
practice where the applicant’s equity is taken away by a mortgage lender. Equity stripping can
come in many forms, but in all cases, is viewed as predatory lending and must be avoided.