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         Income Guidelines           




SALARY & HOURLY WAGES: Generally in calculating effective income in this scenario, the underwriter will use the base employment of the borrower. The underwriter will also to look at the prior two years w-2 to analyze the stability of the current income. If earning are similar or increasing at a normal rate, they will most likely use the current base income. If income varies drastically they may choose to average the income.

Overtime and bonus income: Both may be used to qualify if the borrower has received such income for approximately the past two years and there are reasonable prospects of its continuance. The lender must develop an average of bonus or overtime income for the past two years and the employment verification must not state categorically that such income is not likely to continue. Once again they are looking for consistent earning. If the bonus or overtime varies that may take the most conservative approach of not count the income at all.

Part-time income: Part-time (second job) income, including employment in seasonal work, may be used in qualifying if the borrower has worked the part-time job uninterrupted for the past two years and will continue to do so. Seasonal employment (e.g., umpiring baseball games in summer, working at a department store during the Christmas shopping season) is considered uninterrupted and may be used in qualifying if the borrower has worked the same type of job for the past two years and expects to be rehired during the next season.

Retirement and Social Security income: Such income requires verification from the source (former employer, Social Security Administration) or through federal tax returns. If any benefits expire within the first full three years, the income source may only be considered as a compensating factor.

Alimony, Child Support or Maintenance Income: Income in this category may be considered as effective if such payments are likely to be consistently received for approximately the first three years of the mortgage. The borrower must provide a copy of the divorce decree, legal separation agreement, or voluntary payment agreement and evidence that payments have been received during the last twelve months. Acceptable evidence of regularity of payments includes cancelled checks, deposit slips, tax returns, court records, etc. Periods less than twelve months may be acceptable provided the payor's ability and willingness to make timely payments is adequately documented by the lender.

Effective April 13, 2005: Treatment of Child Support: Previously HUD did not permit the "grossing up" of child support income in  calculating the qualifying ratios. However, after considerable   review, the Department has decided to permit properly documented child support to be grossed up under the same terms and conditions as other non-taxable income sources.

Government Assistance Programs: Income received under a welfare program, unemployment income, workman's compensation, payments for foster children, etc., is acceptable subject to documentation from the paying agency provided the income is expected to continue at least three years.

Projected Income: Except for those situations described below, projected or hypothetical income is not acceptable for qualifying purposes. Exceptions are permitted for income from cost-of-living adjustments, performance raises, bonuses, etc., verified by the employer and scheduled to begin within 60 days of loan closing.

For those borrowers about to start a new job, if the borrower has a guaranteed, non-revocable contract for the new employment that will begin within 60 days of loan closing, the income is acceptable for qualifying purposes. The lender must also verify the borrower will have sufficient income or cash reserves to support the mortgage payments and any other obligations during the interim between loan closing and the start of employment. (This may be appropriate for situations such as a teacher whose contract begins with the new school year, or a physician beginning residency after the loan is scheduled to close.)

EMPLOYMENT BY FAMILY-OWNED BUSINESSES: Borrowers employed by businesses owned by family members are required to provide additional income documentation. These borrowers must provide the normal verification of employment and pay stubs, and evidence that he or she is not an owner of the business. This may include copies of the borrower's signed personal tax returns or a signed copy of the corporate tax return showing ownership percentages.

Analyzing Income: The underwriter will need to establish that the borrower's earnings trend over the previous two years. Annual earnings that are stable or increasing are acceptable. On the other hand, a borrower whose business shows a significant decline in income over the period analyzed may not be acceptable even if current income and debt ratios meet the guidelines. A very detailed letter of explanation will be required.


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