Top 3 income issues that will slow your clear to close

New Year’s  is an interesting holiday to me. It is the only holiday that seems to prompt the most change in people’s lives. When you think about it, does anyone say, “This Thanksgiving I am going to start doing push-ups every day”? Some New Year’s changes occur whether you plan them or like them or know about them!   In the mortgage world, the first few months of the year require us to pay closer attention to the application date and what documents we need during the changeover of tax years to avoid income issues.

Paystubs that have under the required 30 day history

The first issue comes from the most common type of income, which is the employed borrower.  The common documents sent to underwriters to validate the employment income are the forms listed as alternate validation which is the most recent pay stub and W-2’s (either one or two years depending on the program). 

When the borrower presents a pay stub that has pay periods ending in January, the document does not cover 30 days it can sometimes make it hard to determine the pay frequency is bi-weekly (26 pay periods a year) or semi-monthly (24 pay periods a year).

The bigger issue is what I all the “zone of confusion” which is caused when borrowers get “roll over” income from the previous year.  This happens commonly when borrowers get paid on a weekly basis or a bi-weekly basis.  For example if a borrower is paid bi weekly and the pay stub covers the last week in December and the first week in January, when the pay stub is issued it creates havoc on the YTD income showing it much higher then it actually is. Since an underwriter is required to validate that the base pay YTD confirms steady income of 40 hours (or whatever set hours the borrower has fixed) per week.

Here is a link to a previous blog ZONE OF CONFUSION  that better explains those issues.

Do your underwriter and borrower a favor, in January of any year, get the last pay stub for December (even though it may not be the last pay stub issued) .  And include the previous year’s W-2 along with that mid-January pay stub (or better yet a VOE or VOI) to avoid being conditioned for more documents.

Underwriters asking for the newest W-2 before January 31st

The second income issue is when my fellow underwriters ask for W-2’s that have not been issued yet! You have to keep in mind what day the application was created, as that sets the precedent for all documentation, and when it expires, not the current date. 

For example, if you are reviewing a loan on February 3, 2023 that has an application date of January 15, 2023, here is the correct set of documents to ask for on an employed borrower:

  • First, ask for the last pay stub in December. Why December and not January? As stated above, January pay stubs don’t have the required 30 day history. In addition, you need the last pay stub for 2022 because the borrower may not have their 2022 W-2 yet, and you will not have documentation of their income for all of 2022 without it.  Federal law only requires employers to issue W-2s no later than January 31st. This means the borrower may not have the W-2 yet.  Also, since the application is dated before February 1st, the 2021 is the most recent W-2 and will meet guidelines.
  • Second, ask for the 2021/2020 W-2’s for the last two years W-2’s.

Keep in mind if the borrower gives you the 2022 W-2 on January 15th, it is acceptable to have that W-2 and the 2021 to cover the two years, but you will still need that December paystub!

Trying to “mix and match” tax returns for self-employed borrowers

The third income issue occurs with self-employed borrowers. When a borrower is self-employed, filing taxes is a different process  than it is for their employed friends. 

Step one is complete and file your business taxes.  Step two is to complete your personal taxes.  I have seen many loans turned in with the current year personal returns (1040’s) and the previous year’s business returns with an LOE stating “business returns are on extension.”  My mortgage friends, that simply does not work; except in the case of a borrower who owns an 1120 corporation, and even that is sketchy.

The reason that does not work is business profits (or losses) flow onto the personal returns, not vice versa. If you think I am wrong on this, I ask you if you think the IRS would allow you on your Schedule E, page two, section three, under K-1 business to put your income (or loss) as TBD.  That would probably have you end up on the bad end of an audit. 

The rule is if you have filed your 2022 tax returns, that means your 2022 Schedule C, Schedule F, 1065, or 1120S business returns are finalized. I would say most of the time you could include your 1120 corporation as well, but that is the only exception.

Last tip on the mix and match topic is, just like the employed borrower, make sure you are aware of what tax years the self-employed borrower can use. The guidelines refer to tax returns as “the most recent tax year” and “the previous tax year.” From April 19, 2022 up to April 17, 2023, the most recent tax year is 2021. The most recent tax year only becomes tax year 2022 when the deadline to file taxes on April 18, 2023 has arrived.  If the date of the application is April 18, 2023 the two years needed are 2022-2021. If the application date is earlier than April 18th, the two years needed are 2021-2020.

If the borrower has filed their taxes earlier than April 18,2023, they can present the 2022-2021 returns.

I hope these tips help make your loan manufacturing process run smoother and more accurately. Our goal at Blueprint when we built IncomeXpert was to make income analysis compliant, accurate, and better documented.  Check out our income analysis tool at

2 responses to “Top 3 income issues that will slow your clear to close”

  1. Mike Easton says:

    Does blueprint calculate W2 income as well? The issue we have is with multiple pay types from the same employer

    • Michael Whitbeck says:

      Hi Mike
      Our software does handle all the pay types, but your question does not seem to be about the calcuation but the qualifciation of pay types. Feel free to email our support box with what you mean about multiple pay types so we can see how we can assist.

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