To help borrowers and lenders better comprehend the underwriting process, it's necessary to understand all the program requirements in greater detail.
Below, we've discussed how lenders determine the borrowers' and occupants' household incomes. Keep reading to get started.
Determining the Borrower's Household Income
To determine the borrower's household income, lenders first need to determine the gross monthly income and the current gross annual income.
This annual income, also known as the program qualifying income or the compliance income, is different from the credit qualifying income used for credit underwriting when scoring the applicants' qualifications for FHA or USDA-RD loans.
The program qualifying pays attention to the borrowers' income, spouse's income, and income of all the household members aged 18 and above (whether related or not). This rule also applies whether or not the spouse is interested/ will occupy the primary residence or not.
Unlike the credit qualifying income, which is averaged for underwriting, the FL Bond Loan program considers the current Gross Annual Income.
But as stated earlier, this is determined first by calculating the current gross monthly income then multiplying it by 12 months. This should be the case if there are no inconsistencies in earning from one month to the next.
The best way to check this is to review the income recorded on previous tax returns and the Year to Date (YTD) income for each household occupant aged 18 and above.
Once you've determined the current Gross Annual Income for all the occupants, you can simply determine the Household Income then compare it to the income limits and household unit size for the specific county or counties you are interested in.
That said, it's worth noting that lenders and underwriters use the most recent and acceptable pay documentation they collect from borrowers, spouses, and occupants to determine the most accurate Gross Annual Income.
The pay documentation that the lenders and underwriters may require depends on your profession, work schedule, income sources, and how often you receive your paycheck.
Calculating the Gross Monthly Income
The gross monthly income is the total sum of money you, your spouse, and occupants age 18 and above make per month from a job, investments, or/and business. Simply put, it's the total income your household expects from different income sources every month.
Besides the monthly income from your main job or business, additional income may come from part-time employment, overtime, dividends, self-employment, interest, pensions, royalties, net rental income, and VA compensation.
Other income sources to consider are child support, alimony, social security benefits, sick pay, income from trusts, unemployment compensation, etc.
Considering the current and foreseeable economic circumstances, any income source that's fairly stable for 12 months must be included in the calculation.
Other Key Considerations
When calculating the household income, several other underlying issues come in and require proper clarification to minimize errors and sort out ambiguities.
Most of these issues surround employment terms, conditions, mode of payment, types of business, etc.
We've broken them down in greater details below:
Verification of employment
When there's no better income or pay documentation that can be used to validate your household income, a verification of employment (VOE) document may be used.
A VOE may not always be very detailed or sufficient, and the FHA will often require additional documentation.
Calculating wage or salary
add the gross pay from the latest or most recent 4 to 6 weeks' pay stubs.
Divide the total gross pay by the number of pay stubs to find the average pay, then multiply by the pay periods per year.
For instance, if you are paid bi-weekly, multiply the gross income by 26, and if you are paid bi-monthly, multiple the gross income by 24.
Calculating bonus/commission income
If the bonus income were noted but not added on the paystub supplied, you'd have to add them manually.
Here, you'll need to find the average bonus income from the paystubs supplied, then multiply by the number of pay periods in a year before adding the amount to the calculated income from wage or salary.
Calculating income from business/ self-employment
Use your quarterly tax returns or/and financial statements to identify the net YTD income, then add back in depreciation, if any.
Divide your YTD income by the number of months during which you earned to find the average, then multiply by 12.
That said, businesses losses cannot be deducted from another income source.
Verifying the termination of bonus, overtime, or commission payments
In the event of termination, verification has to be provided by a valid third party, e.g., the employer. If these amounts were noted as paid, they could be removed when calculating the program income.
Calculating Dividends/Interest
If you have some investments that pay interests or dividends, use the most recent earning statements issued by the bank, investment agent, or broker.
Identify the YTD dividend or interest earnings, then divide by the number of months to find the average earnings. Multiply this figure by 12 to find the current annual earnings.
If the statements aren't available, use the investment agreement's terms to estimate the interest earnings.
If both aren't available or the assets are still invested and maturing, use the previous year's tax returns or earnings statements to make more accurate estimates.
Calculating child support/alimony
Refer to the monthly pay appearing in the separation agreement or divorce decree.
If you receive less or more than the stipulated amount, use the figure that can be verified, for instance, on bank statements.
Multiply this monthly pay by 12, then add to the other income sources.
Calculating Temporary/pensions payments
Use a recent benefits statement issued by a benefits provider such as workers compensation, pensions, social security, etc., to determine the amount of benefit, term of benefit, and payment frequency.
Multiply the amount by the payment frequency and add to the other income sources. If the benefit isn't payable beyond a given verifiable date, then calculate the total benefits expected through to the end of the benefits term.
Bottom Line
Now that you know the various income types required for the program and how to calculate them, you can easily tell the key areas you need to focus on to qualify for the FL Mortgage program.
The other income types you should fully understand are rental income and border income. If you are looking forward to renting out the 2 to 4 unit property you want to finance, the anticipated rental income won't be used to calculate the Program income. However, the income could be treated as detailed in FHA guidelines.
Additionally, the income of all persons of age 18 and above (border income) who will reside permanently in the property being financed must be calculated and added to the current gross annual income.
When calculating the current Gross Annual Income, you have to add together all the income sources per occupant or borrower.
If the calculated Gross Annual Income varies significantly from that of the previous year, this could be attributed to changes in the working hours.
That said, significant differences should not be attributed to income sources that cannot be accurately accounted for, e.g., child support.
To calculate the household income, you need to find the total sum of each occupant or borrower's current Gross Annual Income.
The final step is to compare your current or calculated Household Income to the Income Limit and check if you are compliant with the FL Bond Loan Program requirements.
By Phil Ganz
Edited by Ryan Skerritt
