Demystifying Income Documentation, By Jason Hillard, Fireside Lending Group

Having discussed the importance of the home loan pre-interview, I would like to dedicate a little time to income documentation. There is a lot of confusion about this subject, and thanks to an atrociously lazy mainstream media, and some irresponsible “new media”, disagreements on the issue are still coming up in day to day business operations.

This is a list of the items your mortgage professional NEEDS from you, REGARDLESS of what type of home loan you want or what type of borrower you are.

–most recent 30 days of paystubs
–most recent statement for any depository account, ALL PAGES
–most recent statement for any other liquid assets or retirement plan
–most recent 2 years federal tax returns with ALL PAGES/SCHEDULES
–any divorce/alimony/child support documentation
–any bankruptcy discharge documentation from the last 10 years

The reality is that most loans now are what is referred to as “full doc”, which is to say that you will be subject to a financial rectal exam. There are some stated income programs coming back, but bank on your next home loan funding as a result of a full fledged inquest into your personal finances. We’re talking mortgage court-marshal, so you need to be prepared.

It may sound funny, but you really should frame your thinking around this analogy. Your mortgage professional is really taking up your case, not just packaging a home loan. The underwriter is the judge, jury, and executioner. That is why you need someone who vigorously represents you, like us. (We are not above plugging our outstanding services.)

So I am now going to explain the thinking behind each of these items, from an underwriter’s perspective. You know you are a good person who will pay back what is owed, and so do we. Let’s delve into the mind of the cagey underwriter though, and see where it leads.

30 days of paystubs
This is pretty simple, obviously. But it does go a little beyond “does this person have a job that pays legal tender?”

What the elusive underwriter is searching for is your year-to-date (YTD) numbers. Does this person work an average of 40 hours? Is there overtime pay that is consistent? What about commisions and bonuses? And is this borrower’s income consistent with the tax returns provided?

Now, some check stub formats provide a lot of information, and others leave something to be desired. However, it is estimated that 30 days worth of paystubs will provide an accurate representation of monthly income calculated on a yearly basis. “In plain english”, you say? Your YTD pay divided by the number of months so far this year minus one month equals your monthly income.

Most Recent Depository Statements
This is usually your most recent bank statement, for all accounts you have. This helps to verify liquid assets. It is very important when running your situation through the automated underwriting software to have this information accurate. This verifies the number of months of cash reserves you have and/or whether you actually have your down-payment available.

Why do we emphasize ALL PAGES? We know…your balance is on the first page. However, when an underwriter sees “page 1 of 7″ on your bank statement, they immediately want to know, and quite honestly NEED to know what the other 6 pages say. Are there car loans, lines of credit, etc. that aren’t shown on the 1st page? The underwriter needs to assume the worst at all times in order to protect their mortgage company from exposure to loan buybacks.

Other Asset & Retirement Statements
More “liquifiable” assets. Stocks, bonds, 401ks, IRAs, etc. What resources do you have that you can sell to make your payments in the event that your income disappears? That’s why we need proof of these items. Important note: for most loan programs, the value of 401ks and IRAs will be decreased by 3o per cent. The reason for this is that if you lose your job, and have to dip into these funds to make your payments, there will be about 30% in penalties and taxes you will have to pay for early withdrawal.

Last Two Years Federal Tax Returns (All Pages)
These aren’t always needed. However, we always ask for them. More and more, the automated underwriting systems are requiring them. And even if the underwriter doesn’t need them, it’s a good idea to show them to your mortgage professional. Why? Because, you will be signing a disclosure (4506T) stating that the lender has the right to request transcripts of your last 2 federal tax returns. This right will be exercised. Having a competent mortgage professional look over them upfront assures a smaller chance of “issues” coming up later. You may have what are called “2106” expenses, which reduce your income in the eyes of the underwriter. If you are riding the fence with your debt-to-income ratio, this can implode your home loan.

As for the self-employed, we will always need 2 years of federal tax returns. There’s no way around it right now.

Divorce Decrees & Child Support
Divorce is a nasty thing, and it can rear its ugly head AGAIN the next time you apply for a mortgage. Is there an alimony agreement? Alimony reduces your income. How long will it continue? Is there child support involved? Again, how long will you be obligated to pay it? Is either amount scheduled to increase? The bank has to look at the big picture when it comes to your overall liabilities, and these can play a huge role in determining your debt-to-income ratio.

Chapter 7 or Chapter 13? When was it discharged? What was included? What was excluded? The details and date of your bankruptcy discharge is a crucial piece of information. The lender must document what liabilities remain, which are cleared, and that the requisite amount of time, as prescribed by the mortgage product you are applying for, has transpired since the discharge.

Other Circumstances
You may have a pension that you are looking forward to in the future. Unfortunately, it doesn’t have any cash value now, so it cannot be considered as an asset right now. And you’re not receiving any income from it right now, so it doesn’t offset your debt-to-income ratio.

Maybe you just started your own business last year, and things are going great. Unfortunately, current underwriting guidelines do not allow us to consider self-employed income unless you have been in business for two years, as evidenced by 2 years of federal tax returns.

There are all kinds of unique situations, and we are always happy to help you determine where you stand.

Please understand that in order to truly apply for a home loan, you need to have these items prepared. We don’t ask for them just to make your life miserable. Your mortgage professional is your advocate, not your enemy. You have to present them with ALL of the information so that they can properly represent you in front of the judge. I mean underwriter.

If you have any questions about income documentation or mortgages in general, please feel free to shoot us an email! Jason Hillard, Fireside Lending Group

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