Can you use variable income with a recent job change?

A common question I get in underwriting is “my borrower works overtime at his new job he started “x” number of months ago, can I use it?” .  Of course, I must respond with a very common phrase said by underwriters, “it depends!”.

Video Lesson – Variable Income

In the video lesson attached I answer the question of what “it depends” means for the underwriter.  This lesson is one of many included in all individual, team, and enterprise subscription levels of our IncomeXpert software.    Here is a quick summary of what you will find in the video!

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The first section of the lesson reviews the variable income guidelines from both agencies:

FNMA B3 3.1-01 General Income Information
FNMA B3 3.1-03 Base Pay (Salary or Hourly), bonus, and overtime income

FHLMC 5301 : General Requirements for all stable monthly income
FHLMC 5303.4 : Additional Employed Income

Our review of these guidelines show that the agencies expect you to confirm the current level of income, the historical level of income, and if a job change would impact the future earning of the borrower.  The key question FNMA/FHLMC want you to answer is “Will the (bonus, overtime, commission, or other variable pay income) continue at the level you qualified the borrower”.

Income Trending Analysis

The second section of the video we go over a quick refresher of how to do trending analysis for variable income.   In my underwriting experience I have seen many loan officers, processors, and underwriters not consider a long enough time factor when looking at variable income, causing buy backs and QC issues.  The key points to remember when trending income for any borrower , especially those who have recently changed jobs is the following:

• If the income is stable or increasing use the lower average of current year Or current year and most recent years
• If the income has a decline but has stabilized, use the lower of the most recent year Or most recent year and previous year.  A key point on this calculations is not to use previous income “highs” to bring up the lower current income in the average.
• If the income has a steady decline, it is recommend not to be used, but if used a full written analysis and explanation must be provided by the underwriter on the level of income used and the rational that it will continue forward.
• My recommendation (this is NOT a guideline) that is a borrower has switched jobs, wait a minimum of 6 months before considering the variable income.  In addition, the borrowers new and old job should be in the same field and a similar position.

The last section of the video I review how to use the IncomeXpert software to do all the income analysis for the job change to give the underwriter the best information possible to make this decision.

In summary, the guidelines do not provide any guidance on how a borrowers change of job affects the approval or not.  The key is to create a consistent method and set of rules at your company that fits your risk appetite.

Hope this video helps answer that popular question of “Can I use this “extra” income?”