9.3 ANNUAL INCOME [7 CFR 3555.152(B)] (10/16/18)
- Kacey Olson
- Marsha Freeman
© RHS HB-1-3555 SFH Guaranteed Loan Program Technical Handbook
Annual income will include all eligible income sources from all adult household members, not just parties to the loan note. The annual income for the household will be used to calculate the adjusted annual household income. The adjusted annual income is used to determine if the household is eligible for a guaranteed loan.
- Use the gross amount, before any payroll deductions, of base wages and salaries, overtime pay, commissions, fees, tips, bonuses, housing allowances and other compensations for personal services of all adult members of the household, unless they meet the exclusion criteria of 3555.152(b)(2) and Attachment 9-A. Documented cost of living allowances or wage increases that will be effective on or before loan closing, must be included in the annual income calculation.
- Include the first $480 of earned income from adult full-time students who are not the applicant, co-applicant, or spouse of an applicant.
- Include the income of an applicant’s spouse, unless the spouse has been living apart from the applicant for at least three months (for reasons other than military or work assignment), or court proceedings for divorce or legal separation have been commenced. Evidence to support living apart for three months may include but is not limited to an apartment lease, bills, or bank statements, in their name alone delivered to a different address, etc. This guidance applies to domestic partners, significant others, and fiancée’s that are currently living with the applicant as a household/family unit. This guidance does not apply to adult dependents age 18 and up.
- An adult member that is currently unemployed but is seeking new employment must have their previous earnings included in the annual income. The previous earnings are not required to be included when there is documented evidence to support they are not seeking to be reemployed, such as a tendered resignation, official termination from previous employer, or a signed statement from the adult household member that they do not plan to pursue new employment.
- Income verifications provided by the applicant that do not currently support historical earnings with the same employer (example: less hours worked, less overtime, less bonus, declining self-employment income, etc.) must be carefully reviewed to determine appropriate calculations.
- Verified changes of circumstance that will affect the ensuing 12 months of income must be considered and documented. Examples include but are not limited to: pending retirement, resignation tendered, documented raise that will occur prior to loan closing, etc.
The calculation of annual income should be logical based on the history of income and documentation provided. Lenders may contact USDA to discuss income types and calculations to ensure every household is properly reviewed.
Annual income calculations will typically vary from adjusted annual and repayment income.
- Written, oral, or electronic verifications, and documents provided or prepared by third-party sources are acceptable. These verifications must be provided directly to the lender.
- Lenders may not accept verifications or documents transmitted by or passed through an interested third party such as builders, real estate professionals, or sellers.
- Facsimiles, photocopies, computer/photograph images and computer-generated documents may be accepted in lieu of original forms.
- The lender is responsible for the integrity and accuracy of the information in the mortgage underwriting file. Regardless of the type of documentation used to support the loan application, the documents must be legible and free of any alternations, erasures, “white-outs,” or similar indications that changes have been made.
- Verification and documentation of household annual income will be retained in the lender’s permanent case file.
- Income and asset documents and verifications cannot be greater than 120 days old at time of loan closing. Divorce decrees, income tax returns, and other documents that do not expire, will continue to have the most recent or filed copy accepted.
- Applicable income and asset documents greater than 120 days old at the time of loan closing must be updated or re-verified to support applicant/household eligibility.
Lenders must verify the income for each applicant and adult household member (excluding eligible full-time students age 18 and above) through one of the following documentation methods. Refer to Attachment 9-A for documentation and verification options that are acceptable to support income types.
- W-2 forms for the previous two tax years, which may be electronically generated, provided in paper format, as reported on filed Federal Income Tax Returns, or IRS transcripts, and
- Paycheck stubs or payroll earning statements that report the most recent four weeks of earnings, and
- Prior to loan closing a Verbal Verification of Employment (VVOE) must be obtained for all applicants within 10 business days of the note date/loan closing. This VVOE will be retained in the lender’s permanent loan file. Adverse changes to the applicant’s employment may render the loan ineligible.
- Written Verification of Employment (VOE): Electronically generated verifications from the employer or a verification service utilized by the employer, Form RD 1910-5 “Request for Verification of Employment,” or an equivalent HUD, VA, Fannie Mae, or Freddie Mac form may be utilized to verify the current year-to-date (YTD) and previous year’s employment earnings. This verification must confirm base income/wages, bonus, overtime, commissions, and other income sources earned as applicable, and
- Recent paycheck/earnings statement: Lenders must compare a recent paystub that includes YTD earnings and employment information to the VOE, and
- Prior to loan closing a VVOE must be obtained for all applicants within 10 business days of the note date/loan closing. This VVOE will be retained in the lender’s permanent loan file. Adverse changes to the applicant’s employment may render the loan ineligible.
- Two consecutive years of signed Federal Income Tax Returns with all schedules filed with the IRS, or IRS transcripts that include all applicable schedules, along with a recent profit and loss statement (not required to be audited), and
- Two consecutive years of signed business Federal Income Tax returns with all schedules filed with the IRS, or IRS transcripts that include all applicable schedules, if required for the business type, and
- Confirmation the business is operational must be obtained within 30 days of the note date/loan closing. Documentation may include evidence of a website, additional internet documentation, licensing bureau certification, etc. Adverse changes to the business may render the applicant ineligible.
- Lenders are encouraged to utilize Fannie Mae Form 1084 “Cash Flow Analysis,” Fannie Mae 1088 “Comparative Income Analysis,” or comparable self-employment evaluation form, and Attachment 9-E to assist in the calculation of self-employment income.Negative business income is considered “zero” for annual income calculations.REMINDER: Refer to Attachment 9-A for documentation options and verification requirements of additional income and asset types that may apply to the household.
IRS Transcripts: Verification of Income
Lenders must require each adult household member as applicable to complete and sign IRS Form 4506-T for the previous two tax years at the time of loan application. The 4506-T must request full transcripts with all schedules.
Full time students age 18 and up that are not the applicant, co-applicant, or spouse of an applicant are not required to sign the 4506-T or have transcripts provided.
Guaranteed loans cannot be made to a household that exceeds the applicable adjusted annual income limit. The transcripts provide a qualify control measure to ensure all income and asset earnings reported to the IRS have been disclosed to the lender.
Lenders must obtain and review the transcripts prior to loan closing and retain them in their permanent loan file.
Previously unknown/undisclosed income or asset sources that are identified by the transcripts will require additional review by the lender and may render a loan file ineligible.
When the lender is unable to obtain transcripts from the IRS for an applicant or required household member, they may document their correspondence to and from the IRS in the permanent loan file to support the omission. The asset statements must be reviewed to ensure no errant deposits are identified that may be attributed to additional income sources. The loan file will be considered complete when the explanation is documented. Loan closings will not be delayed due to obstacles in obtaining the tax transcripts.