Happy New Year 2024 from the Blueprint Team, and welcome to our Zone Of Confusion Blog PART TWO. Posting these blogs has become a tradition for us as we go into our 11th year in business in 2024! If you have not read the fist part of this blog, “Zone of Confusion Part 1 of 2,” that covers the “wild YTD calculations,” take a look there, and this blog continues on from that blog.
So lets dive into issue two with the Zone of Confusion. What income documentation is needed?
Employed Borrowers Who Apply Between Jan 1st and Jan 31st
First we will start with what is required as far using paystubs and W-2’s for your borrower! Here is what Fannie Mae has on the topic, and most agencies are the same:
The paystub must be dated no earlier than 30 days prior to the initial loan application date and it must include all year-to-date earnings. Additionally, the paystub must include sufficient information to appropriately calculate income; otherwise, additional documentation must be obtained.
Paystubs must comply with B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns.
A big key in that sentence is “must include sufficient information to appropriately calculate income”. So what is the sufficient information you must see?
- Clearly identify if the borrower is full time or variable hours
- Clearly identify if the pay period is weekly, biweekly, semimonthly, or monthly
- Clearly identify if the borrower has debts or garnishments taken out of their pay
Missing debts, most payments are taken out once per month. What if you have the January 22nd paystub, but the $500 car payment the borrower has is on auto pay is deducted on the last day of every month?
Alimony & Child Support are also a very common deduction you need to see a full month to confirm an amount, generally the frequency as the pay periods (weekly, bi-weekly, etc).
Conclusion… When you are under 30 days YTD, I would be very cautious using just that one paystub as you saw in part 1 of this blog. With less than 30 days, you have no good way to determine a YTD to confirm variable or full time hours.
In January 2024, If your borrower provides you with a paystub dated in December and the 2022/2021 W-2’s, you have what you need for base pay determination, provided the paystub isn’t any older than 30 days prior to application. The reason is the YTD IS reliable in December since most of the year has passed. That is the good news. Per the guidelines you don’t have to provide any January paystubs (or 2023 W-2 ) yet.
When do you need 2024 W-2s’ versus 23 W-2’s?
Some mortgage professionals get into January 2024 and ask for the 2023 W-2. That is NOT needed! Legally, employers have until Jan 31 to issue the current W-2. So asking for a 2023 W-2 in January means the borrower may not have it yet. Can they provide the 2023 before February 1st? Yes, if they have it, but again not required until application dates of Feb 1st 2024!
I know the second question is, “But what if the borrower applies in January but closes on March 1st?” Keep in mind MOST income documentation is based on application dates, NOT settlement or note dates. There is a maximum age as well, which expires a pay stub at 120 days. At that point the W-2’s would be most recent based on the application date.
Employed Borrowers Who Apply February 1st or Later
Once we get into February, we now have to shift gears on what is needed with app dates of February 1st or later. Remember, the key is PAY PERIOD, not pay date. I highly suggest you get a paystub with a 30-day history to use a “single paystub” in January. If not, you may also have to provide the last paystub in December 2023 to meet guidelines. Also, in February the W-2’s you need are 2023/2022 (time to drop the 2021 W-2s).
Self Employed Borrowers Who Apply Between Jan 1ST & April 15th
The key phrase to remember about self employed borrowers is what these two dates mean:
- Most Recent Year Filed Tax Returns
- Previous Year Filed Filed Tax Returns
In 2024, if the dates are in between Jan 1st and April 15th, this means 2022 is the most recent year and 2021 would be the previous year.
The IRS does not require your personal returns until April 15th. Keep in mind YOU CAN NOT complete your personal tax returns UNTIL you have completed the business returns. So when we talk about the Most Recent Year and Previous Year, this is always based off personal returns not business. You can NOT submit 2023 1065’s and a 2022 personal return (or say the personal return is not done yet).
The reason for this is because you must report your final business income on your personal returns for Schedule C / F / K-1 from 1065 and K-1 from 1120S. The exception to that rule is the 1120 corporation since it is truly a “separate entity”.
Just like the employed borrowers, there is a limit to how late you can close this loan using the 2022/2021 returns. Here is the guidance on what happens from April 15th up to June 30th 2024:
The previous year’s tax return (the return due in April of the current year) is recommended, but not required.
The lender must ask the borrower whether he or she has completed and filed his or her return with the IRS for the previous year. If the answer is yes, the lender must obtain copies of that return. If the answer is no, the lender must obtain copies of tax returns for prior two years.
Bottom line, do your best to make sure you have the most recent filed tax return when you get the borrower closed. Legally you don’t need it, but keep in mind that if you are audited and the investor finds out that the borrower did in fact file the 2023 return prior to close, that is fraud that will come back to the submitting lender for a possible buy back!
Self Employed Borrowers Who Apply Between April 15th & Oct 15th 2024
After we cross over April 15th 2024 the most recent year is now considered 2023 with the previous year at 2022. If the borrower filed an extension, provide evidence of that extension plus a P/L covering from Jan 1st 2023 up to the most recent month.
Hopefully this blog will get you off to a great start of the tradition of avoiding that zone of confusion for income documentation in the new year!