Income Verification PDF

4. Income By Amber Hatter Summary 1 The document details the process of Third-Party Verification, focusing on employment, deposit, rent, and mortgage verifications to assess a borrower's financial stability. 2 It explains how to calculate Gross Monthly Income using various payment frequencies and em...

4. Income By Amber Hatter Summary 1 The document details the process of Third-Party Verification, focusing on employment, deposit, rent, and mortgage verifications to assess a borrower's financial stability. 2 It explains how to calculate Gross Monthly Income using various payment frequencies and emphasizes the importance of income verification across different types, including employment, self-employment, and other sources, like bank statements. 3 The document also covers Qualifying Ratios (front-end and back-end ratios), Loan-toValue (LTV), and Combined Loan-to-Value (CLTV) for risk assessment, highlighting the necessity of thorough documentation for income verification. Review of qualifying ratios Review of LTV and CLTV Agenda Income documentation Third party verification Gross monthly income I. Review of Qualifying Ratios > Front End and BackEnd Ratios A. Front-End Ratio Front-end ratio (housing expense ratio) results from dividing the housing expenses for the proposed loan by the monthly income of the borrower. This ratio indicates what portion of gross monthly income is used to pay Principle, Interest, Taxes, Insurance (PITI). For example, if the PITI is $1,000 and the total monthly gross income is $4,000, the front-end ratio will be 25 percent ($1,000 ÷ $4,000 = 25%). B. Back-End Ratio Back-end ratio (total debt-to-income ratio) results from dividing the housing expenses for the proposed loan plus the borrower's other monthly credit obligations by the gross monthly income of the borrower. This ratio indicates what portion of gross monthly income goes toward paying debts. For example, the borrower’s monthly gross income is $4,000. If the total obligations of the borrower are $1,400 ($1,000 for housing expenses and $400 for other credit obligations), the ratio would be 35 percent ($1,400 ÷ $4,000 = 35%). II. Review of LTV and CLTV >Appraisal purposes A. Loan-to-Value (LTV) LTV This expresses the relationship between the loan amount (the principal) and the value of the property as a percentage (LTV). LTV = Loan Amount ÷ Value (lesser of price or appraisal) For example, the loan is $800,000. The appraisal is $1,000,000. Thus, the LTV = $800,000 ÷ $1,000,000 =.080 = 80% B. Combined Loan-to-Value (CLTV) The CLTV is the relationship between ALL loan balances and the value of the property as a percentage. CLTV = (Total of all liens: 1st, 2nd, etc.) ÷ Value (lesser of price or appraisal). For example, the first loan is $500,000; the second loan is $100,000. The appraisal is $800,000. Thus, the CLTV = ($500,000 + $100,000) ÷ $800,000 = 0.75 = 75%. III. Income Documentation >Proof of income A. Income To qualify for a mortgage, borrowers must demonstrate sufficient income for repayment, ensuring income stability and continuity. Verification through credible sources, such as employment records, is essential. Loan programs typically mandate employer confirmation of probable continued employment. A two-year work history, preferably in the same field or inclusive of relevant education, is required, though it may consist of various jobs. You must obtain documents that show proof that a two-year history of receiving this income exists and proof that this income is likely to continue. 1. Salary or W-2 Income The two-year history can be established by including the most recent 30-days pay stubs and the year-end W-2 for the prior two years. Continuance of employment will be established using a V.O.E. form. 2. Overtime or Bonus Income The borrower must show proof that a two-year history of receiving this income exists. They must also show proof that this income is likely to continue. The borrower will need to provide documentation, such as pay stubs for the most recent 30-day period of the present year and the final W-2 for the prior 2 years. Each of these documents must show the inclusion of the overtime or bonus income. If the borrower will use part-time income, such as income from a second job, or seasonal employment, a twoyear history of receiving this income must also be proven. 3. Part-time Income The V.O.E. will be used to show proof that the part-time income has a high probability of continuing. If the income cannot be used because of an interruption in receipt of income, you will still wish to document it. It might be considered as a compensating factor. Commission income is based on the average of the previous 2-years income. 4. Commission Income The borrower must provide their full Federal Tax Returns, including all schedules, covering the past two years and you must obtain a year-to-date income statement from the employer. Any un-reimbursed business expenses must be subtracted from the gross income in order to gain the usable income figures. 5. Retirement, Social Security, Public Assistance, or Disability If the borrower is using retirement or social security income as part of their qualification package, verification from the source of the income must be obtained. An award letter from the social security administration or a statement of retirement income will be used for documentation purposes. If the income will discontinue within 3 years, the income cannot be used to qualify the borrower and used only as a compensating factor. 6. Alimony, Child Support, or Income from Separate Maintenance This income is not required for qualification, but a borrower may choose to use this income if they wish. To use this income, the borrower will need to supply a 12-month payment history from the ex-spouse or the courts showing timely payment will be required. Evidence that such payment will continue for at least 3 years must be provided. A copy of the divorce decree, settlement statement, or other legal documents is needed. These will illustrate the amount of the income, history of income, and term for the continuance of this income. In order to use income from a note, the borrower must provide a copy of the endorsed and binding note. The borrower must also provide proof that payments have been received for a minimum of 12 months. The proof can be in the form of bank statements or copies of canceled payment checks. 7. Notes Receivable If the note expires within 3 years, it cannot be used for qualifying, but may be considered as a compensating factor. 8. Interest and Dividends Interest and dividend income may be used if documentation, such as tax returns or account statements, illustrates a 2-year history or receiving of this income. 9. Rental Income Rent received from investment properties owned by the borrower may be used if the receipt of these rents can be documented. Income from roommates and boarders is not acceptable. Rental income is calculated from the borrower’s Schedule E of the Form 1040. Depreciation can be added back in to the total received. You should note that while positive rental income is considered as gross income, negative rental income must be treated as a recurring liability. 10. Self-employment Income A borrower with 25% or more ownership interest in a business can be considered self-employed. A borrower must have more than a one-year history for income to be considered. A two-year full tax return will be required. 11. Bank Statements Some loan programs will allow the borrower to use the deposits shown on 12-months or 24-months bank statements as proof of income. To qualify for a bank statement program, the borrower’s position must validate the probability that their business is a cash-based business. The deposits showing on 12-consecutive month’s bank statements will be totaled and divided by the 12 months to arrive at an average income. Keep in mind that this is considered a high documentation loan and may be penalized with higher interest rates or a higher down payment. IV. Third Party Verification >VOE, VOD, VOR, VOM A. Verification of Employment (VOE) B. Verification of Deposit (VOD) C. Verification of Rent (VOR) D. Verification of Mortgage (VOM) V. Gross Monthly Income >Conversions A. Conversions used to compute gross monthly income Hourly x 40 = Weekly Weekly x 4.333 = Monthly Annual ÷ 12 = Monthly Weekly x 52 = Annual Monthly x 12 = Annual Bimonthly (twice per month) x 24 = Annual (e.g. paid on 1st and 15th, semi-monthly) Biweekly (every 2 weeks) x 26 = Annual (e.g. paid every other Friday) Average W-2’s - most recent two consecutive years ÷ 24 months Average tax returns most recent two consecutive years ÷ 24 months #1 Example Mathew is paid $2,307 biweekly. What is his monthly income? $2,307 x 26 pay periods ÷ 12 months = $4,998.50 #2 Example Mark is paid $1,158 weekly. What is his monthly income? $1,158 x 52 weeks ÷ 12 months = $5,018 #3 Example Luke is paid $2,500 bimonthly. What is his monthly income? $2,500 x 24 pay periods ÷ 12 months = $5,000 #4 Example John works 25 hours per week and earns $17 per hour. What is his monthly income? 25 hours/week X $17/hour X 52 weeks ÷ 12 mo. = $1,841.67 #5 Example Paul earns $1,500 per month. What is his monthly income? $1,500 #6 Example Mary provides W-2 2010 showing $100,000 income, W-2 2011 showing $110,000 income. How much monthly income does she make? ($100,000 + $110,000) / 24 months = $8,750 #7 Example Ruth provides Tax Form 1040 for 2022 showing 65,000 , and Tax For 1040 for 2023 showing 55,000. How much monthly income does she make? ($65,000 + 55,000) / 24 months = $5,000 The End