© 2018 Freddie Mac Single-Family Seller Servicer Guide
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| Subject | Requirements and guidance |
| Analysis of income fluctuation and stability | The foundation to the appropriate analysis and determination of income stability when evaluating fluctuating earnings is documenting and verifying an adequate length of historical earnings. In addition, the degree of volatility present within the income and/or the irregularity of the income must be analyzed. The Seller must evaluate the income trend and use the amount that is most likely to continue for the next three years. Additional guidance for restricted stock (RS) and restricted stock units (RSU) income |
| Calculation Fluctuating hourly employment earnings | The earnings reflected on the YTD income verification documentation must fully support and be consistent with the most recent year's earnings. For instance, if the January YTD paystub reflects that for a weekly pay period the Borrower worked 38 hours, the W-2 for the previous year must support a similar level of earnings based on the pay rate and hours worked. If the earnings are consistent and supported, the Seller must average the most recent year and YTD income over the applicable number of months documented. If the earnings are not consistent (e.g., showing a high degree of volatility or an irregular pattern), additional analysis is required and additional documentation (e.g., additional year of income history, explanation from employer for inconsistency) will likely be necessary to determine income stability and develop an accurate calculation of qualifying income. Refer to Section 5303.2(b) for fluctuating hourly employment earnings. |
| Calculation Additional employed income – fluctuating earnings (other than RS & RSU) | A documented split between the base non-fluctuating earnings or fluctuating hourly earnings and the additional employed income (e.g., bonus, overtime, tips) should be obtained for the most accurate analysis and calculation of stable monthly income. For commissions, the split must be obtained to determine whether a two-year average of unreimbursed employee expenses must be deducted from the income. For commission income that represents greater than or equal to 25% of the income from the commissioned employment, the two-year average of unreimbursed employee expenses reflected on Schedule A and IRS Form 2106 (if applicable) must be deducted from the Borrower's gross commission income. If the YTD earnings are consistent with the previous year(s) earnings, then the Seller must average the income over the number of months documented. If the earnings are not consistent (e.g., showing a high degree of volatility or an irregular pattern), additional analysis is required and additional documentation may be necessary to determine income stability and develop an accurate calculation of qualifying income. Refer to Section 5303.3 for more information about additional employed income – fluctuating earnings. |
| Calculation RS and RSU subject to performance-based vesting provisions | Based on the form in which vested RS or RSU are distributed to the Borrower (i.e., as shares or its cash equivalent), the Seller must use the applicable method(s) below to calculate the monthly income: RS or RSU distributed as shares Multiply the 52-week average stock price as of the Application Received Date by the total number of vested shares distributed (pre-tax) to the Borrower in the past two years, then divide by 24. (e.g., if 200 vested shares were distributed (pre-tax) in the past two years and the 52-week average stock price as of the Application Received Date is $10, multiply 200 x $10 then divide by 24= $83.33 monthly income) RS or RSU distributed as cash equivalent Use the total dollar amount distributed (pre-tax) from the cash equivalent of vested shares in the past two years and divide by 24. Refer to Section 5303.3 for more information about additional employed income – fluctuating earnings. |
| Calculation RS and RSU subject to time-based vesting provisions | Based on the form in which vested RS or RSU are distributed to the Borrower (i.e., as shares or its cash equivalent), the Seller must use the applicable method(s) below to calculate the monthly income: RS or RSU distributed as shares Multiply the 52-week average stock price as of the Application Received Date by the number of vested shares distributed (pre-tax) to the Borrower in the past year, then divide by 12. (e.g., if 50 vested shares were distributed (pre-tax) in the past year and the 52-week average stock price as of the Application Received Date is $10, multiply 50 x $10 then divide by 12 =$41.67 monthly income) RS or RSU distributed as cash equivalent Use the total dollar amount distributed (pre-tax) from the cash equivalent of vested shares in the past year and divide by 12. Refer to Section 5303.3 for more information about additional employed income – fluctuating earnings. |