Most loan officers reading this blog have run across a loan that made them think… If only the borrower could wait an extra 30 days to close we could use their new pay raise to qualify! Sadly, I have had to decline loans that missed the DTI buy one or two percent because we were not allowed to use future income based on the loan program they choose.
One of the reasons I write these blogs is to point out some underwriting topics that will help you close more deals. Many mortgage professionals think that both agencies are basically the same, while much of what they do is the same, it is worth studying their differences. The future income rule is one of those topics that Fannie / Freddie handle very differently.
Freddie has allowed future income for several years now, and on their recent selling guide announcement (2019-9) have offered a nice little improvement. In case you’re not familiar with the guidelines you can find them in FHLMC allregs 5303.2 under Income Commencing After The Note Date.
In these guidelines Freddie offers two options. The key difference between these options from your companies perspective is pretty big. The difference is that you can sell the loan to Freddie with option one, but option two cannot be sold to Freddie until the new income is started. The reason I point this out first is that this option may not be available to your company if you are a broker/correspondent due to the time frames and how the loan is not saleable until the income starts.
Option two has more advantages for the borrower, including time frame until pay increase is realized, occupancy type, and transaction type. This makes sense since Freddie won’t buy the loan until the new income has started so there is little risk.
Option one allows the use of future income that starts within 90 days of close, can be used on a primary residence only, and only for purchase or rate and term refinances.
The improvement noted in selling announcement 2019-9 is that if there is only a 15 day gap between the close date and the new pay plan then the extra reserve requirement can be waived. The second changes are as of 08/01/2019 additional documents to confirm the new pay has started on option two is required.
Until next time… Cheers!