For all income, the Seller must determine how the Borrower is paid in order to accurately analyze and calculate the stable monthly income used for qualifying. The documentation in the Mortgage file must support the Seller's income analysis and calculation. If the documentation does not support the income used for qualifying purposes, further analysis is required and additional documentation may be necessary to support the stability of the income and the amount of income used to qualify. A written analysis of the income used to qualify the Borrower must be retained in the Mortgage file.
(a) Base non-fluctuating employment earnings Base non-fluctuating earnings may include both exempt (salaried) and non-exempt earnings; however, the pay rate and number of hours worked must not fluctuate between pay periods. The income documentation must support base non-fluctuating earnings. Refer to Section 5303.2(b) for additional information about base non-fluctuating earnings types.The following chart describes the calculation methods for base non-fluctuating employment earnings taking into consideration the typical pay periods of weekly, bi-weekly, semi-monthly and monthly.
| Calculation of base non-fluctuating employment earnings (Refer to Section 5303.2(b)) | |
| Pay period type | Calculation |
| Weekly | Multiply the base non-fluctuating weekly gross pay by 52 pay periods and divide by 12 months |
| Bi-Weekly (Every two weeks) | Multiply the base non-fluctuating biweekly gross pay by 26 pay periods and divide by 12 months |
| Semi-Monthly (Twice per month) | Multiply the base non-fluctuating semi-monthly gross pay by 24 pay periods and divide by 12 months |
| Monthly | Use the base non-fluctuating monthly gross pay |
| Annual base non-fluctuating salary paid out over less than 12 months per year | For some Borrowers, such as certain employees in the educational field, the annual base non-fluctuating salary may be paid over a time period of less than 12 months. For example, if the annual base non-fluctuating salary is paid out over 10 months of the year, multiply the monthly base salary amount by 10 months and divide by 12. |
(b) Fluctuating employment earnings These requirements apply to all employed income that fluctuates.Refer to Sections 5303.2(b) for information about fluctuating hourly earnings and Section 5303.3 for information about other types of additional employed fluctuating income (e.g., bonus, overtime).
| 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. The Seller must review all year-to-date (YTD) earnings and compare those earnings with the earnings from the last one or two years, depending upon the documentation requirements. If a significant degree of volatility or irregularity is present, (e.g., year over year, quarter over quarter), additional analysis is required and additional documentation may be necessary to determine income stability. The analysis and documentation must support the amount of income used to qualify the Borrower. If a Borrower is currently on temporary leave, follow the guidance in Section 5303.5. Declining income trends If the Seller's analysis of the income shows a declining trend, the Seller must conduct further analysis (e.g., reason for the declining trend, documentation showing current income has stabilized) to determine whether the income is currently stable and can be used for qualification purposes. The Seller written analysis must justify that the income is likely to continue at the level used for qualifying. If the Seller determines the income is stable, the lower amount of the income must be used. The Seller cannot average the Borrower's income using a previous higher level unless there is documentation of a one-time occurrence (e.g., injury) that prevented the Borrower from working or earning full income for a period of time and evidence that the Borrower is back to the income amount that was previously earned. |
| 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 | 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. |
| Related Guide Bulletins | Issue Date |
|---|---|
| Bulletin 2016-23 | December 15, 2016 |
| Bulletin 2016-19 | October 27, 2016 |
Additional Resource: https://www.allregs.com/tpl/Viewform.aspx?formid=00051757&formtype=agency#page=650