At Blueprint we get all kinds of questions on how to calculate different types of income through our support email. In a recent email, the client told us the borrower had an unusual income history. The borrower had four to five different W-2s for each year in the last two years and had three different employers in the current year. After a few emails back and forth, our team was able to determine his borrower was a skilled trades or union worker, and we were able to assist our client with how to handle the income properly.
The skilled trade workers hold jobs for short periods of time, not because they get a job and quit that job a few months later, but because their careers are a string of temporary assignments. These are borrowers who generally are part of a union and who are assigned out by their union halls to work on projects. Once the project is complete, the union will generally have another project waiting for them to start when they finish their current assignment. The professions I have mainly seen this type of income are construction trade professions (electricians, welders, carpenters, etc). The other group I run across that has these types of arrangements are movie and TV production workers, such as camera operators, key grips, sound engineers, and other building trades that help make the “movie magic” come to our TV and movie screens.
Bottom line is if you have a job like this, you cannot work for 30 years adding electrical panels to a building or work on the set of the next Hollywood blockbuster for decades! BUT you are really never out of work. You just move on to the next project.
FNMA, FHLMC, FHA, VA, and USDA don’t currently spell out this type of employment in Allregs, but there is a way to determine their income that will meet agency requirements.
Step 1
On the borrowers 1003 I recommend that you put the employer as the borrower’s union hall, not the current employer shown on the paystub. The reason I put the union hall is this is a more accurate representation of the borrower’s employment status. The borrower probably has been with the same union hall and has had the same profession for years, and gets most if not all of their work from the union hall.
You could make the argument that the union hall is not the employer (which is true), but putting down the current assignment the borrower is on is also not a fair representation of the borrower’s employment either. If you put down actual employers over the last two years, it would appear the borrower is “job hopping,” and your 1003 will have pages of addendums to it. I personally think it is better to have your verbal VOE confirm that the borrower is in good standing at the union hall and is on assignment than having a verbal VOE for every job the borrower has had in the last few years.
Step 2
Follow the traditional method of income trending for variable hour or rate employees to choose the right income. What the borrower currently makes per hour is not as relevant to what the qualifying income is versus what the borrower has been averaging per month. Since the borrower will be assigned different jobs at different pay rates, it is much more accurate to get an average income worked up than use the hourly rate.
1) Add up all of the past year W-2’s and get a monthly average of income
2) Add up all of the most recent years W-2’s and get a monthly average of income
3) Add up all the final paystubs for the current year and get a monthly average of income
Once you have those three figures determined, you can choose which average is the most accurate representation of income, for example, the YTD 2023 + 2022 or the YTD + 2022 + 2021 the proper denominator.
Side note, what I said above would apply to any base pay. Base pay would include any base hourly, vacation, holiday, or sick leave.
See screenshots below for our IncomeXpert calculator on variable employed income. This will save you time by NOT adding this up by hand! Based on the process above, adding up all the YTD base pay and entering it under 2023, 2022, and 2021 will allow IncomeXpert to determine the income for you.
Step 3
The borrower should have a minimum of two years history of this type of employment. The variable income guidelines do allow for less (12-24 months), but if a borrower is new to this type of profession, any less than two years’ becomes very risky.
You need two years to answer these key questions:
- How many jobs per year does the union hall offer the borrower?
- Since each job can have a different pay rate, what is the average rate?
- Is the borrower skilled enough to keep getting new assignments? And finally;
If your borrower has also been getting unemployment income to fill in the gap between assignments, with two years’ history of the unemployment income receipt, you could use this to help qualify the borrower.
Step 4
My last but very important pointer for this type of borrower is do not approve a borrower that is not on a current assignment. There is no guarantee from the union hall how many jobs come up per year or when the borrower will get their next job. If the borrower cannot provide a current paystub that shows current work, wait until the union hall gets them started at their next position.
Summary
In my years of underwriting for borrowers that earn income as described, I have not had one loan come back from an internal QC or investor QC report disagreeing with this method of income evaluation. I can’t point you to a paragraph in Allregs that outlines what I did here exactly. However I can assure you by following the steps I have outlined and explaining your income calculations on your 1008, there should be no issues approving your borrowers file.
9 Responses
Quick question, for this type of employment wouldn’t we require Written verifications of employment breaking down the income earnings from all job assignments in previous 2 years? Typically, these types of employees earn hourly, overtime, per diem, etc. The income calculation on this post shows bonus, overtime, and hourly but W-2s were used to calculate the income? Can you confirm averaging the W-2 earnings from each employer without showing a breakdown of earnings be acceptable? Thanks so much!
Hi Matthew
The Union Workers it would be difficult to get all the VOEs BUT if you could it would be better so you can break down all the income types. BUT if you just have W-2 I have found that the agencies allow you to “lump” all these incomes. I fully admit there is nothing in the guidelines for or against that approach but it has worked for me for years. The key thing about the union workers is they get OT after 8 hours in any one day or all OT after 40 hours..so their 40 hours is not like ours. I would NOT use that method for any long term employee as the guidelins are clear about trending for each type of income. Thanks for the questoins!
Thank you for sharing Union Worker Income Calculation technique. We do have a similar borrower that provided 16 W2s for recent 2 years. Borrower trade skill is a Stage Lighting Technician for 7 years now. We are waiting for the borrower to call Loan Originator back regarding employment clarification. In the mean time, I would like to ask a question.
In your years of experience with Union Worker …
Is it possible for 1 person represented by another different Union? (One person represented by 2 different Unions)
-OR-
One person can only represented by 1 Local Union.
What do you do when the borrower’s w2 wages (and YTD) show considerable overtime as well? Would the OT be included in this method when averaging also? Meaning, the w2s don’t break out overtime so we are lumping base and OT together.
Hi Kim
I have found for union workers if you just have W-2 and paystubs the agencies allow you to “lump” all these incomes (base pay , overtime, per diem, etc). There is nothing in the guidelines for or against that approach but it has worked for me for years so with warning I stated this is a “best practice”. The key thing about the union workers pay plan is they get OT after 8 hours in any one day or all OT after 40 hours..so their 40 hours is not like most workers OT (where OT is not issued unitl 40+ hours of regualr work). I would NOT use that method for any long term employee as the guidelins are clear about trending for each type of income. I also take the tact of using 12 months in every year , so I am not trying to “take out the gaps” which also makes the income a little more conservative. Thanks for the question.
I have a Pipe fitter who has been working in the trade for the last 2 years, however, he recently joined the union just 3 months ago, this came with a substantial increase in pay as union scale is higher. Now that he is a union member he can expect to maintain this scale going forward as this is the union required scale, calculating his income using any of the previous positions would be inaccurate as those were within his trade, but non – union. Wouldnt it be appropriate to use the new publicly available scale for the union as the base pay. So even though he makes slightly higher wage than the publicly available base wage for a Union Pipefitter in his local, could the base hourly wage for that local union be used to calculate income ??
Hi Charles
Thanks for the suggestion, but using a public pay scale to determine a person wages would be very difficult. You would have to know what level the borrower is at the union they joined (apprentance, journeyma, or master in the example of construction), then the number of years in that level and profession, and COLA / Hazard adjustments for the pay at each job. For underwriting looking what someone is currently making and has made to get an average is much more conserative , but that is the better default in lending. Another note is you stated your borrower has been in the union 2 months… what if since he is low man on the seniortiy list he is passed up more often then a person at the union 5 years… this means he could have more gaps in employment “lowering” his average earning on an annual basis.
Thanks for the well thought out comment, we appreciat the feedback!
My client’s income dropped by 80% in 2023 due to the writer’s strikes. He took on one off jobs meanwhile to make ends meet. He’s back on assignments now. Will I still be able to use 24 months average to calculate the qualified income?
Hi Emily
This would be call for the UW to make , but since the strike was industry wide you may have a chance and I could recommend the following approach. If the 2022/2021 income was stable or increasing, determine that monthly amount. Then compare that number to the borrower’s income from the end of the writer’s strike to the current date (with a 6 month minimum return to work) I could see an argument for the income as long as the current amount was stable. If we read strictly on the guidelines, the borrower’s income going down in 2023 would mean a decline and not use the income. But this is an extenuating circumstance (the strike was out of their control). AGAIN this is up to the UW who is reviewing the loan.