Section 1.37a Income Analysis

Transcription

1 Section 1.37a Income Analysis In This Section This section contains the following topics. Overview... 2 General... 2 Introduction... 2 Related Bulletins... 3 Qualifying Income... 4 Stability of Income... 4 Variable Income... 5 Acceptable Sources of Income... 6 Unacceptable Sources of Income... 8 Stability of Employment... 9 Furloughed Borrowers... 9 Frequent Job Changes Re-entering the Workforce Income Calculation Formulas Unreimbursed Business Expenses Fraud Prevention Guidelines Income Validation Guidelines Attachments/Worksheets/Tools Income Analysis Page 1 of 14

2 Overview General This document provides general guidance for evaluating income stability, adequacy, and likelihood of continuance to determine qualifying income. These are key factors used in qualifying the borrower and assessing their capacity to repay the mortgage over the life of the loan. This guidance outlined in this document applies to all conventional non-agency loan programs unless otherwise specified in the product description. For specific documentation requirements refer to the applicable product description and Section 1.37: Income Validation Guidelines. For Agency loan programs guidance, see the General Income Information subtopic within the Income topic in Section 2.01 Agency Loan Programs of the for guidelines. Introduction Employment and income are key components of successful home ownership and the capacity to repay the loan request. Qualifying income should be stable, predictable, and likely to continue. The borrower must demonstrate the financial capacity to repay the proposed real estate transaction in addition to all other debt obligations. Sources of income may vary and borrowers may receive primary income from only one source or several different sources. Note: Primary employment may be less than 40 hours per week (i.e., nurses, etc.) The calculation used to determine the qualifying income is required in every loan file. Lenders may use the following worksheets as a tool to assist in income calculation: SunTrust Salaried/Hourly Income Calculation Worksheet (COR 1404), Fannie Mae Cash Flow Analysis form 1084 for self-employed borrowers, or Freddie Mac Income Analysis form 91 for self-employed borrowers, and Rental Income/Schedule E Calculation Worksheet (COR 0602). Note: In all other cases SunTrust requires lenders to include income calculation method documentation in the loan file; however, does not require the above forms to be used in determining the qualifying income. Income Analysis Page 2 of 14

3 Related Bulletins General Related bulletins are provided below in PDF format. To view the list of published bulletins, select the applicable year below Note: There were no related bulletins published in 2009, 2010, or Income Analysis Page 3 of 14

4 Qualifying Income General The borrower s capacity to repay the loan, as well as stability of income and employment are important loan qualifying considerations. Qualifying income must be recurring, received regularly, and reasonable based on the source, industry and occupation. Stability of Income General Generally, stability of income is income that has a history of receipt for at least a two (2) year period. Determining income stability and continuance for all sources is based on the required documentation as defined in this guidance and/or specific product guidelines. If there is evidence the income will not continue or will no longer be received, the income is not considered stable and cannot be used as income to support the loan request. In deciding whether to use income to qualify the borrower, the likelihood of continuance of all income sources must be assessed and supported in the loan file. To demonstrate the likelihood that a consistent level of income will continue to be received for borrowers with less than predictable sources of income, verification and information about prior earnings is required. Examples of less predictable income sources include commissions, bonus, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradespersons. If a borrower s income stream is heavily impacted, either directly or indirectly, by the success of a new business or enterprise, or is reliant upon an emerging or unproven industry, then the stability and continuing reliability of that income source should be questioned and the underwriter s justification for considering this income must be documented in the file. Income Analysis Page 4 of 14

5 Variable Income General All income that is calculated by an averaging method must be reviewed to assess the borrower s history of receipt, the frequency of payment, and the trending of the amount of income being received. Examples of income of this type include income from hourly workers with fluctuating hours, or income that includes commissions, bonuses, or overtime. Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may be considered as acceptable income, as long as the subtopic for that income allows less than a two-year history and the borrower s loan application demonstrates that there are positive factors that reasonably offset the shorter income history. The frequency of the payment (weekly, biweekly, monthly, quarterly, or annually) must be determined to arrive at an accurate calculation of the monthly income to be used in the trending analysis. Examples: If a borrower is paid an annual bonus on March 31st of each year, the amount of the March bonus should be divided by 12 to obtain an accurate calculation of the current monthly bonus amount. Note that dividing the bonus received on March 31st by three months produces a much higher, inaccurate monthly average. If a borrower is paid overtime on a biweekly basis, the most recent paystub must be analyzed to determine that both the current overtime earnings for the period and the year-to-date overtime earnings are consistent and, if not, why. There are legitimate reasons why these amounts may be inconsistent yet still eligible for use as qualifying income. For example, borrowers may have overtime income that is cyclical (transportation employees who operate snow plows in winter, package delivery service workers who work longer hours through the holidays). Investigate the difference between current period overtime and year-to-date earnings and document the analysis before using the income amount in the trending analysis. After the monthly year-to-date income amount is calculated, it must be compared to prior years earnings using the borrower s W-2 s or signed federal income tax returns (or a standard Verification of Employment completed by the lender or third-party employment verification vendor). If the trend in the amount of income is stable or increasing, the income amount should be averaged. If the trend was declining, but has since stabilized and there is no reason to believe that the borrower will not continue to be employed at the current level, the current, lower amount of variable income must be used. If the trend is declining, the income may not be stable. Additional analysis must be conducted to determine if any variable income should be used, but in no instance may it be averaged over the period when the declination occurred. Income Analysis Page 5 of 14

6 Acceptable Sources of Income General Sources of income are classified as acceptable and non-acceptable and are specified within the applicable product descriptions. Hourly Income Pay is on an hour-by-hour basis at a certain rate. Hourly employees are also considered to be eligible for overtime, according to federal law, if they work over 40 hours in a work week. Borrowers are typically paid weekly or biweekly. Includes employees that are part time, seasonal or receive tips/gratuity. Wage Earner / Salaried Income Generally, a non-self-employed borrower receives a W-2 at the end of the year that summarizes their total earnings. Includes borrowers that receive wages in the following categories: hourly, weekly, biweekly, part-time, and/or seasonal, employees may receive bonus and commissions and tips/gratuity. Borrower(s) with less than 25 percent ownership interest in a business are not considered self-employed and will be evaluated as a Wage Earner/Salaried Income borrower for underwriting purposes. Self-Employed Includes Sole Proprietorship, Partnership, Corporations, and S-Corporations. Borrower(s) with a 25 percent or greater ownership interest in a business is considered self-employed and will be evaluated as a self-employed borrower for underwriting purposes. Greatest weight is given to historic income data and earnings as reported to the Internal Revenue Service (IRS). Rental Income Rental income is generated from the subject property or other residential real estate owned by the borrower. SunTrust encourages the use of a Rental Income Worksheet when using rental income for qualifying income in the loan evaluation. Non- Employment Income Income in this category includes: alimony, separate maintenance, child support, foster care, unemployment, Continued on next page Income Analysis Page 6 of 14

7 Acceptable Sources of Income, Continued Non- Employment Income, (continued) welfare, aid to dependent children, disability/worker s compensation, retirement, pension, Social Security, annuity, IRA, military/va benefits, trust, dividends and interest, inheritance, guaranteed income, Notes receivable, mortgage differential, cost of living allowance, rents, royalties, and capital gains. Note: See specific product guidelines for acceptability. Other Income Documentation requirements for other income are addressed in each specific product description. Income Analysis Page 7 of 14

8 Unacceptable Sources of Income Unacceptable Sources of Income The following sources of income are unacceptable for SunTrust: asset depletion (i.e., non-retirement account withdraws) (except as allowed by product guidelines), capital withdrawals, draw income, illegal income, gambling earnings, income based on future earnings (except as allowed by product guidelines), income not reported on tax returns, mortgage credit certificates (MCCs), projected income (except as allowed by product guidelines), room/boarder rent from subject property (except as allowed by product guidelines), trailing co-borrower income, VA education benefits, and Any income that cannot be documented, verified, and any income not reportable on tax returns. Income Analysis Page 8 of 14

9 Stability of Employment General The employment requirements for an applicant are a minimum of six (6) months in current position and a minimum of two (2) years in the same line of work to document stability and continuance. Employment requirements are defined in the product descriptions. A minimum two (2) year employment history must be reflected on the application. The purpose of reviewing employment history is to insure that the borrower has received stable income from employment and other acceptable sources. There must be a reasonable expectation that the employment will continue in the foreseeable future. Furloughed Borrowers General Employee furloughs are mandatory time off from work with no pay. Used as an alternative to a layoff, employee furloughs can occur in both public and private sector organizations. In mandatory employee furloughs, employees take unpaid or partially paid time off of work for periods of time. The employees generally have either scheduled time off or call back rights and expectations. Borrowers on mandatory furlough and are not working at all must return to work prior to the closing of the mortgage loan in order to use the employment income for qualifying purposes. Borrowers on mandatory furlough who are working adjusted and/or reduced schedules and receiving reduced pay may be considered if qualifying employment income can be determined and verified with a likelihood of continuance. Verification documentation may include, but is not limited to the following: satisfactory written or verbal VOEs, satisfactory letters from employers, and/or satisfactory payroll documents (i.e., paystubs/payroll ledgers, etc.). In all cases, the terms of the furlough must be documented in the loan file. Income Analysis Page 9 of 14

10 Frequent Job Changes General Individuals who change jobs frequently require more thorough examination of employment and income. A frequent change in employment for reasons other than advancement (i.e., changing careers) or extended periods of unemployment indicate an unreliable work history and unstable income for repayment of the loan request. Changes in the same line of work, industry, or occupation for career advancement are acceptable. Borrowers in certain industries and occupations experience frequent job changes due to the nature of the work (i.e., seasonal or unskilled labor). The borrowers should not be penalized provided they have demonstrated the ability to maintain satisfactory repayment of debt. Reference: See the Stability of Income topic or appropriate product description on how to document income stability. Re-entering the Workforce General Borrowers who are re-entering the workforce after an extended absence may be considered. Previous work history in similar occupation/industry or job re-training/education in a new field is documented to demonstrate stability of income used for qualifying. Reference: See applicable product description for additional information and documentation guidance. Income Analysis Page 10 of 14

11 Income Calculation Formulas General The following calculation formulas are provided to assist in accurately calculating qualifying income Income documentation must be carefully reviewed to determine how the borrower is compensated as well as the frequency (i.e., hourly, weekly, biweekly, bi-monthly, monthly, etc.). Hourly Hourly rate x number of hours worked = weekly pay Weekly pay x 52 weeks / 12 months = monthly base income Weekly Weekly base salary x 52 weeks / 12 months = monthly base income Bi-weekly Salary Borrower is paid every 2 weeks for 80 hours with 26 pay periods. Bi-weekly base salary x 26 pay periods / 12 months = monthly base income Semi-monthly Salary Borrower is paid on 1 st and 15 th of each month for hours with 24 pay periods. Semi-monthly base pay x 24 pay periods / 12 months = monthly base income Monthly Borrower is paid once a month for hours per pay period. Adequate documentation must be in the loan file to verify the number of monthly pay periods for the borrower. To accurately calculate this income, multiply the monthly amount by the verified number of months paid and then divide by 12 months. Inaccurate calculations may have a severe impact on the borrower s qualifying income. Example: a teacher is paid $3,000 per month for nine (9) months. Correct calculation: $3,000 x 9 months = $27,000 / 12 months = $2,250 Incorrect calculation: $3,000 x 12 months = $36,000 / 12 months = $3,000 Annually Annual gross pay / 12 months Borrowers Who May be Paid Less Than 12 Months Per Year Some borrowers' annual salaries may be received over a time period of less than 12 months. It is important to determine how the borrower is paid in order to accurately calculate income. Determine how often and for how long the borrower is paid and then determine monthly income based on the calculations above. For example, if a borrower is paid 10 months of the year, multiply their monthly salary by 10 months and divide by 12. Income Analysis Page 11 of 14

12 Income Calculation Formulas, Continued Cross Check Income To cross check the income, two (2) basic calculations for each borrower should be performed. Calculate the base pay and then determine the year-to-date average calculation for comparison. The lesser of the two (2) is the most conservative approach. Factor in changes to salary, overtime, promotions, etc. when determining which calculation to use for qualifying. Low year-to-date earnings should be addressed and/or documented accordingly in the loan file, even if the more conservative income is used to qualify. Insure compliance with established guidelines and policies. Income Analysis Page 12 of 14

13 Unreimbursed Business Expenses General Unreimbursed business expenses must be subtracted from the borrower s qualifying income before determining housing and total debt-to-income ratios. Unreimbursed business expenses are usually found on Schedule A and Form 2106 of the personal federal tax returns (1040s) and/or IRS tax transcripts. A minimum two (2) year average is used, unless the amount of expenses is increasing. If expenses are increasing, use a one (1) year average of the amount reported on the most recent tax returns/transcripts. Unreimbursed business expenses are not limited to self-employed borrowers, but can occur in several different job types, including commissioned employees, teachers, truck driver, etc. Careful review of federal tax returns and IRS transcripts must be completed when determining borrower s unreimbursed business expenses and qualifying income. Fraud Prevention Guidelines General Reference: See Section 1.19: Fraud Prevention Guidelines for additional information. Income Validation Guidelines General Reference: See Section 1.37: Income Validation Guidelines for additional information. Income Analysis Page 13 of 14

14 Attachments/Worksheets/Tools General SunTrust Mortgage encourages lenders to include income calculation method documentation in the loan file; however, does not require the above forms to be used in determining the qualifying income. Job Types and Special Considerations Click here for special considerations on certain types of employment. Income Analysis Page 14 of 14