Blueprint

HOW TO DO A MORTGAGE INCOME ANALYSIS

mortgage income analysis

One of the lessons I learned during my underwriting career is that the most likely reason a borrower defaults is due to their DTI ratio (Debt To Income), or stated in plain english you “can’t afford” the payment on your house.  This is because the DTI either starts off too excessive or becomes too excessive after the loan closes.  Some of this is out of the hands of the lenders and is due to life changing circumstances like divorce, loss of job, or medical issues, but some of this is NOT out of the hands of lenders.

This is why all Fannie Mae, Freddie Mac, FHA, USDA, or VA have these four requirements on every type of income analysis to qualify.

Rule #1 Income must reasonably continue for 36 months
Rule #2 Income must be stable to qualify
Rule #3 Income must have proper history to qualify
Rule #4 Income must be documented to qualify

In this blog I will  touch on “Stable To Qualify” and tell you a bit about how our software IncomeXpert helps you master determining stability and qualification of income.

How do you complete income analysis for mortgages?

My short answer is you have to do “enough analysis” to determine if an income is stable. What I mean by enough analysis is that agencies require the underwriter to determine if an income is “most likely to continue” at the rate you approved.  They are not asking for the worst or most conservative income.  By contrast they are not looking for the optimistic income to approve the loan either.

The key concept here is called Income Trending Analysis.  All agencies require it, but in my opinion, Fannie Mae does the best job explaining what is expected and their explanation is found in FNMA Guidelines  B3-3.1-01 .

Before I continue on here, I want to let you know BEFORE it seems overwhelming, his is why we created IncomeXpert.  We wanted to take the tedious calculations and ensure they are done consistently for every loan.  Our interface shows you with clear trending icons backed up by well documented calculations that SHOW you visually the trending analysis and will direct you to the RIGHT CHOICE on every income analysis you complete.

Now that you know there is an easy to use tool found at www.getblueprint.io for you, let’s go over the agency requirements so you can understand income analysis that the agencies require!

Step 1: What types of income need trending analysis

Quick note, incomes like fixed base pay (i.e. salary), pensions, annuities, and military pay are not variable and therefore don’t need trending analysis as we describe below.  These sources of income typically don’t change from month to month, so we aren’t required to do a trend analysis here.

Incomes that REQUIRE trending analysis are incomes that include variable income sources including part-time hourly, self-employed, commissions, bonuses, overtime, tips, and dividends to name a few.

Step 2: Determine the trend of income

To determine the trend of income to complete an income analysis, you first gather the proper income documents for the current year, most recent year, and past year.  Example for September 2022 the current is YTD 22, the most recent is 2021, and the past year is 2020.  Then get the monthly average for each period (22 / 21 / 20 ) and compare.

A proper trending analysis will show one of the following three outcomes for each individual income source (base pay, overtime, bonus, etc)

  • Income is stable or increasing  (Green UP arrow in IncomeXpert)
  • Income that was declining, but is NOW stable or increasing (Yellow UP arrow in IncomeXpert)
  • Income that is declining (Red DOWN arrow in IncomeExpert)


Step 3: Choose the “Most Likely To Continue” income

Now that you have calculated the trending history, you can give a much better answer on which income is most likely to continue.  For income that is stable or increasing, take the lowest of these three:

  • 2022 YTD  / 12 months.  This is called annualizing the income.  This assumes the current YTD income will likely continue for the rest of the year.
  • 2022 YTD average. This is the actual monthly income averaged over the months to date in the year.
  • 2022 +2021. This is averaging the income across the YTD and the prior tax year.
  • 2022 + 2021 + 2020 This is averaging the income across the YTD and the prior two tax years.

The reason I advise to take the lowest is that the minimum is most likely to continue.  If a person’s income is going up we must allow them enough time to show it is not a fluke or spike in pay.

For income that was declining (IE between 20 and 21) but now is stable or increasing take the lowest of these two incomes:

  • 2022 YTD  / 12 months.  This is called annualizing the income.  This assumes the current YTD income will likely continue for the rest of the year.
  • 2022  YTD average.  This is the actual monthly income averaged over the months to date in the year.
  • 2022 + 2021 average NOTE: Do not add in the 2020 income since there was a decline between 20/21
  • The reason we don’t add 2020 at all is that it was an inflated income year.  Adding in the 2020 income pushes the borrowers calculated income higher than their current earning reality. You are NOT allowed to mix the bad with the good.

For income that is declining take the lowest of these two incomes:

  • $0 per month.  Since the income is declining it is not likely to continue UNLESS the underwriter can document that the lowest income will in fact continue at a stable rate, this is solely at the discretion of the underwriter.
  • IF the underwriter determines the income is stable use either 2022 / 12 months regardless of the date or 2022 / YTD denominator , you will NOT be able to add in previous years as they are higher.

As I mentioned, using IncomeXpert, all of these income calculations are done for you instantly and automatically so your income analysis is done in less time!  So while many (underwriters?) may say they don’t need a tool to help them calculate employed borrower income (paystub/w2 or VOE/VOI), when you consider all of the income analysis you need to complete, a tool starts making sense for speed, consistency, and risk management.

For more information on IncomeXpert contact us for a demo

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