August 22nd, 2020 12:31 PM by Jackie A. Graves, President
Lending guidelines are pretty firm when it comes to validating income. One of the primary duties a lender performs when evaluating a loan application is whether or not the borrowers can comfortably afford the new monthly payments. This is done by way of comparing monthly income with monthly debt to arrive at a debt ratio.
Verifying income for most applicants is mostly straightforward. To verify monthly income, applicants simply need to provide copies of the most recent paycheck stubs covering a 30 day period. At the same time, lenders want to see at least two years of this income being paid on a regular basis. This is accomplished by providing the last two years of W2 forms. For those who are self-employed, the last two years of tax returns as well as a year-to-date profit and loss statements are needed.
The loan application has a section that asks for monthly income from a variety of different sources. Is the income from a regular paycheck. This is referred to on the loan application as “base” income. Is there bonus income that might be used? Bonus income can be used to help qualify but only if the income has been shown to be paid before, has a history and the lender can determine if the income is likely to continue.
A quarterly performance bonus comes to mind, for example. An annual bonus, maybe not. The bonus income should be viewed as being able to be used to service monthly debt and expenses. A Christmas bonus may not be around any longer come July. But a bonus received every 90 days might.
There is also a space for overtime income. For those paid hourly, overtime income, income beyond a 40 hour week, can be used to help qualify. But again, like bonus income, there needs to be a two year history as well as the expectation overtime income will continue into the future. This is easily verified with paycheck stubs and W2 forms. Commissions can also be counted as income using the same guidelines. A two year history and a determination the additional income is likely to continue. Dividends and interest income can be used as can income from rental property.
But there’s another space on the application labeled “Other.” For any income outside of the above mentioned categories, it falls into the “other” slot. Someone receiving support payments can put this amount in the category if the applicant chooses to use support payments to help qualify. For support payments, a copy of the divorce decree needs to be reviewed showing how much the support payments are to be as well as how long the payments will continue. If it is determined the support payments will last for at least another two years, it can be counted as qualifying income.
Any other income can be listed on the application with supporting documentation. The income must be verified as having a history and the lender determines the income is likely to continue into the future. How far into the future? Most programs don’t have a definite time frame but many lenders like to see a three year window. There’s no way to truly make that determination but showing a two year history can make the cased that the income is likely to continue well into the future.
To view the original article click here