Post on 13-Mar-2020
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Calculating Income
Presented by Genworth Mortgage Insurance
May 2017
Agenda
What we will cover
– General Income Requirements
– Documentation Requirements
– Fannie Mae
– Freddie Mac
– Practice Cases
– Genworth Website
– Helpful tools
2Calculating Income
Let’s Take A Quiz
?True or False: I own 10% of a Partnership. Do I get a Form K-1
3Calculating Income
•True or False: If a borrower earns commission income and the trend
over two years is declining, lenders can always take the most recent
year and average over 12 months to be conservative?
See Fannie Mae Seller Guide or The Guide for Freddie Mac for more information
Income Requirements
:Establish that income is
– Steady, Stable or increasing.
– Likely to continue into the future
– Must be able to document the income as per investor guidelines (Are they
reporting it on their tax returns??)
– Income from other Non-Employed Sources such as Child Support, Interest
Income or Retirement income might be considered qualifying income but have
different qualifying guidelines
– Policies change often, always verify requirements for uncommon or seldom used
income types
4Calculating Income
Use Of Declining Income Is One Of The Most Common
Calculation Errors
Income Document Requirements
Documentation Requirements
– Manual Underwrite: Typically requires two year history to be received and
documented
– Automated underwriting (Loan Product AdvisorSM f/k/a Loan Prospector ® or
Desktop Underwriter®):
• Typically follow the findings report or feedback certificate
• Often documentation is reduced from a manual underwrite
– Additional documentation is always required to clarify a question, inconsistency
or continuance of an income source
– Conservative income calculations are preferred
– When MI is needed, always verify MI guideline requirements as well
5Calculating Income
Documentation Overlays May Exist; Always Check
Investor Credit Policy For Additional Requirements
Resources
:To access the Fannie Mae Seller Guide
– Go to http://www.fanniemae.com
– Click on “Single Family”, “Guides” and then “Allregs”
– Allregs covers both manual and DU underwriting requirements
– Chapter B3-3-2 of the Seller Guide discusses Income Underwriting
requirements
6Calculating Income
•To access the Freddie Mac LPA Documentation Matrix and The
Freddie Mac Seller/Servicer Guide:
– Go to http://www.freddiemac.com
– Click on “Single Family”, “ and then “Allregs.” which is Freddie Mac’s
Seller/Servicer Guide or
– Click on “Learning Center” then “Quick References” for
– Loan Product Advisor Documentation Matrix (Updated February 2017)
– Rental income matrix, (updated in April 2017)
– Chapter 5301.1 of Seller/Servicer Guide for Stable monthly income and asset
qualification for Freddie Mac
Documenting Employment and Income
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Two Year History is Required on the 1003 for all applicants
For Freddie Mac, Gaps Greater Than 30 Days Should
Be Addressed By The Applicant
Documenting Employment and Income
8Calculating Income
Do Not Lump Income Types Together Break
Out Income Type For Proper AUS Results
IRS Form 4506-t
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www.irs.gov
IRS Form 4506-t
10
www.irs.gov
Calculating Income
The IRS Form 4506-T
– IRS document that is used to retrieve past federal tax returns, 1065, 1120S,
1120, or W-2 and 1099 transcripts that are on file with the IRS.
– It gives permission for a third party to retrieve the tax payer’s data.
– Each applicant must sign a separate form regardless of the income source.
– The form is good for 120 days once signed
– If you requested and received tax or W-2 transcripts, lenders must validate the
income documentation provided by the borrower.
When Completing A Blank 4506-t Form Lenders Must
– Fill in the recipient of the tax documents – either its name or the name of the
servicer, if servicing will be transferred within 120 days of the taxpayer signing
the form
– Indicate that the request is for documentation concerning the year or years for
which the borrower’s income was or will be used in underwriting the loan
– Date the form with the date on which the borrower signs the form (or ascertain
that date the borrower signed)
Fannie Mae Guidelines
4506-t Must Be signed Once During The Application Process– The timing is at the lender’s discretion but it must be signed on or before the closing of the
mortgage loan
– The Lender must document the requirement to obtain an executed IRS Form 4506-T with
the IRS in their written quality control (QC) plan
– The borrower may need to complete multiple forms for different types of returns
– If the form is executed prior to closing it must be used to validate the income
documentation provided by the borrower and used in the underwriting process.
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Freddie Mac’s LPA Documentation Matrix
Calculating Income 12
Sample 4506t results
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Fannie MaeUpdates, Policies and Fannie Mae’s Form 1084
Calculating Income
Fannie Mae Selling Guide Self-Employment
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Fannie Mae Selling Guide
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Fannie Mae Selling Guide
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See B3-3.1-01, General Income Information (10/24/2016)
Fannie Mae Selling Guide
Trends of Income
– Verify trends of income before using to qualify for a mortgage
– Income used must be likely to continue
See B3-3.1-01, General Income Information (10/24/2016)
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21
See B3-3.1-04, Commission Income Requirements (06/30/2015)
Calculating Income
22
See B3-3.1-04, Commission Income Requirements (06/30/2015)
Calculating Income
What’s New Key Updates in Selling Guide
Income Changes
– Always verify with your specific
investor for any overlays or variances
to this policy
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Highlights
– Core principles of prudent underwriting must be followed when considering
income for qualifying purposes
• Source, amount, history of receipt and likelihood of continued receipt
– Borrowers with commission income representing 25% or more of the borrower’s
total annual employment income, any unreimbursed business expenses must be
subtracted from the gross commission income
– Income that does not have a defined expiration date (long term disability, interest
and dividend income and social security retirement income) no longer requires
documentation of three-year continuance
– Income that DOES have an expiration date, lenders must document a three-year
continuance (see Fannie Mae Seller Guide)
26Calculating Income
Fannie Mae Selling Guide
Fannie Mae Selling Guide
Continuance of Income
27Calculating Income
See B3-3.1-01, General Income Information (06/30/2015)
28Calculating Income
Fannie Mae Selling Guide
Verbal Verifications
– Verbal verifications of employment for employed borrowers are required to be
completed within 10 business days of closing or, if lenders choose, a VVOE can
be completed prior to loan delivery
– Verbal verifications of employment for self employed borrowers can now be
completed within 120 days of note date or prior to loan delivery (Check your
investor overlays)
29Calculating Income
Fannie Mae “Optional” VOE fields
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Fannie Mae Selling Guide
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Fannie Mae Selling Guide “Other Income”
Fannie Mae Job Aids/FAQs
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https://www.fanniemae.com/singlefamily/originating-underwriting-training
Fannie Mae Underwriting FAQs
Answers Common Lender Income
Questions– https://www.fanniemae.com/singlefamily/origin
ating-underwriting-training
33Calculating Income
Fannie Mae Underwriting FAQs
Answers Common Lender
Income Questions– https://www.fanniemae.com/singlefamily/
originating-underwriting-training
34Calculating Income
35
Freddie Mac Bulletins, Documentation and Rental Income Matrix and Freddie Mac
Form 91
Calculating Income
Bulletin 2016-19-Income Changes
36Calculating Income
Lenders May Implement ALL Income Changes Effective Loans With
Settlement Dates On Or After March 6, 2017; Mandatory For Loans With
Settlement Dates Of July 6, 2017 Or After; LPA Updated March 6, 2017
General Requirements for Documentation
Used to Verify Employment and Income Standard documentation for all income types (5302)
– YTD Paysubs
– Must include the employers name, date issued, pay period covered, pay
period dates with earnings & complete YTD earnings
– W-2 Forms
– Year End Paystub with YTD earnings or Final Military LES
– W2 Transcripts
– Written VOE
– Must include employment date, position, income types (base, hourly rate),
YTD earning and most recent 1 or 2 year calendar period earnings
– 10-Day Pre-Closing Verification (PCV)
– Written VOE
– VVOE
– Military LES
– 3rd Party employment verification service
– Third-Party verification service providers
37Calculating Income
Self-Employment Freddie Mac
38Calculating Income
http://www.freddiemac.com/singlefamily/guide/
Freddie Mac Seller/Servicer Guide
39Calculating Income
Chapter 5301.1 General requirements for all stable monthly income
and asset qualification sources
Income Continuance Requirements
Income continuance charts were added to Topic 5301.1
– Income and earnings types typically without documentable
continuance
– Income types with documentable continuance
– Other income types that may or may not have documentable
continuance
40Calculating Income
Income Continuance Requirements
41Calculating Income
Freddie Mac Primary Base and Secondary
Employment (5303.2 Primary and Secondary Income)
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Freddie Mac Commission Income
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Freddie Mac Additional Income Sources (5303.2 Primary and Secondary Income)
44Calculating Income
Freddie Mac Documentation Matrix
Documentation Matrix
– Assists in properly
underwriting and documenting
the loan file for Freddie Mac
Eligible loans only
– Lenders may have overlays
so always check specific
program requirements
– Updated February 2017
45Calculating Income
http://freddiemac.com/learn
46Calculating Income
Freddie Mac Monthly Income
47Calculating Income
Income Documentation Requirements
48Calculating Income
Freddie Mac Income Documentation
Freddie Mac Form 91
Freddie Mac Income Analysis Form for self-employed borrowers
– Sellers are required to analyze self employed borrowers using Freddie Mac
Form 91 or a similar form
– The form should be maintained in the loan file
– Form can be used for “other types of non-self employed income such as
commissioned income, and capital gain income
– Borrowers that have 25% or more ownership in a business are considered self
employed for Freddie Mac qualifying purposes
– Tax returns may be required for additional scenarios such as:
• Applicants working for family members
• Working for the property seller
• Commission income of 25% or more
• Rental or Farm Income
49Calculating Income
http://freddiemac.com/learn
50Calculating Income
Freddie Mac Income Documentation
Rental Income Matrix
•Guidance for topics such as:
– When we a lease be used
– Form 998 requirements
– Income Approach requirements
– When Tax Returns are required
– Reserve requirements
– Maximum # of financed properties
– No gift funds allowed reminder
Calculating Income 51
•Updated April 2017
http://www.freddiemac.com/learn/pdfs/uw/rental.pdf
52
Document Review Pay Stubs, W-2s, Written VOEs
Calculating Income
Income Conversion Exercises
53Calculating Income
Calculate the monthly income for each pay scenario above.
$60,000
$750
$1,000
$1,250
$20/ hour, 40 hours weekly
54Calculating Income
Reminders:
– The borrower’s name and SSN# must be consistent with the application
(Spelling, middle initial or a JR or III).
– Computer generated, if not the most recent tax return is required and/or a written
voe
– If paid hourly, the number of hours must be noted on the paystub
– Dated within 30 days of application; If stale dated ask applicant for more recent
stub.
– YTD income must be provided and should be consistent with monthly income.
– Note any commission, overtime, or bonus income-don’t use if you don’t need.
– Review for possible liabilities that may need to be included in your debt ratio
(child support or alimony or IRS garnishment or a new loan take out).
– If automatically deposited, cross reference the income to the bank statement
– We are calculating income but also validating the document, does employer
match back to application? To the W-2?
Examining Pay Stubs
Paystub
55Calculating Income
56Calculating Income
:W-2 Reminders
– Name and SSN# match application and also the pay stub
– Applicant’s address should also match the 1003 and bank statement mailing
address
– Should be the most recent one or two (if required)
– Is the ytd income consistent with monthly income, if not obtain explanation
– Employer addresses match application
– Employer ID# must be valid (XX-XXXXXX) is the proper format
– FICA and Medicare withholding based on wages can be checked
– You generally should NOT have the Employer’s Copy or the Social Security
Administration Copy!
– Review the document at application, don’t just shove in the loan file
– Obtain tax transcripts to support income if needed
Examining W-2s
57Calculating Income
Examining W-2s
58Calculating Income
:VOE Reminders
– Independently verify address to which you are sending
– Do not put “Attention to” on the form
– Forms should be signed, dated with signature and printed name of employer
– If faxed, note the origin of the faxed document-Is it coming from the employer?
– Income Consistent with application
– Is bonus, or overtime likely to continue? Probability of Continued Employment?
– Review for different handwriting styles, cross outs, white out or cutting and
pasting
– Should it be handwritten? Large corporations probably not!
– The VOE cannot be hand carried by the applicant NOR should it be mailed to a
P.O. Box unless you have verified that that is the employer’s protocol
– VOE can be helpful in determining a trend of non-salaried income such as
overtime or bonus
– Verify document does not expire prior to note date (Typically documents valid for
four months)
Written Verification of Employment
59Calculating Income
60
Exercises
Calculating Income
Income Calculation Exercises
61Calculating Income
Keep in Mind:
Sometimes there are
several ways to calculate
income!
62Calculating Income
Local Iron Workers Union W2’s from various jobs
Income 15 ’16 `17
– W2 $52,399 $61,555
Y-T-D paystub* As of 09-30-17 $59,765
John is unemployed seasonally.
Calculation W2’s & Paystub and 1099
Gross Monthly Income
Borrower
Base Income
Self Employed
Overtime
Bonuses
Commissions
Dividends/Interest
Other
Sub Total
Net Rental
Subject Net Cash
Total
What is the qualifying monthly income?
63Calculating Income
Calculation from W2’s & Paystub
-- Sally works as a school nurse and works from Sept 1st- June 30th earning $802 every two weeks.
-- She also receives child support for $500 per month that will continue for 10 years.
’15 ’16 ’17
W-2 $28,897 $30,250 * See pay stub
* YTD pay stub as of 12/15/17 - $33,925
- Sam’s current salary is $35,400
Gross Monthly Income
Borrower
Base Income
Self Employed
Overtime
Bonuses
Commissions
Dividends/Interest
Other
Sub Total
Net Rental
Subject Net Cash
Total
Gross Monthly Income
Borrower
Base Income
Self Employed
Overtime
Bonuses
Commissions
Dividends/Interest
Other
Sub Total
Net Rental
Subject Net Cash
Total
What is the qualifying monthly income?
64Calculating Income
Gross Monthly Income
Borrower
Base Income
Self Employed
Overtime
Bonuses
Commissions
Dividends/Interest
Other
Sub Total
Net Rental
Subject Net Cash
Total
General Hospital
Income ‘15 ‘16
– W2 $44,766 $48,998 *see paystub
Y-T-D paystub* As of 12-15-17 $51,747
Abby is an ER nurse. She is paid $25.25 per hour and works a 40hour shift each week. In June she returned to Medical School so she transferred to the Midnight shift beginning 6-1-17. She is paid a $1.26 an hour differential for working Midnight to 8:00am.
What is the qualifying monthly income? Does her y-t-d paystub reflect the correct income?
Calculation from W2’s & Paystub
65Calculating Income
Gross Monthly Income
Borrower
Base Income
Self Employed
Overtime
Bonuses
Commissions
Dividends/Interest
Other
Sub Total
Net Rental
Subject Net Cash
Total
Paystub
66Calculating Income
Gross Monthly Income
Borrower
Base Income
Self Employed
Overtime
Bonuses
Commissions
Dividends/Interest
Other
Sub Total
Net Rental
Subject Net Cash
Total
Pay Stub with Prior Year W-2
Calculating Income 67
Pay Stub with Prior Year W-2
Calculating Income 68
69Calculating Income
Eli receives $4080 in taxable social security income as per his most recent tax returns. His
application states he is 42 years old with no dependents
Calculate the monthly social security income ONLY for Eli. Do you have to do anything special?
0
Calculation from Tax Returns
70Calculating Income
Base Income
Self Employed
Overtime
Bonuses
Commissions
Dividends/Interest
Other
Sub Total
Net Rental
Subject Net Cash
Total
Income ‘15 ‘16 ’17ytd *
– Base $50,000 $53,000 $12,500
– Commission $0 $0 $35,000
Y-T-D-2015 through 6/30/17*
– Assume it is currently 6/30/17!
Donovan’s pay structure changed 1/1/17 to base plus commission-New Annual Salary is $25000
What is the qualifying monthly income?
Calculation from VOE
http://fanniemae.com/portal/index.html
Fannie Mae Website
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Fannie Mae Selling Guide
Calculating Income 72
Freddie Mac Seller/Servicer Guide
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Quick Reference Guide and Webinars
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Monthly Webinar
Calendars
Course Catalog
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mi.genworth.com/LenderServices/Underwriting
Genworth Rate Express® Updated!
Calculating Income 79
Genworth Rate Express
80Calculating Income
81Calculating Income
GENWORTH RESOURCES
ActionCenter®: 800 444.5664
Your Local Genworth Underwriting Manager
Your Genworth Account Executive or Manager
82Calculating Income
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